Take advantage of pension legislation overhaul

by Center for Personal Finance editors

ATLANTA (8/15/06)--The size of your 401(k) is probably going to increase, thanks in part to new pension legislation--recently passed by Congress and likely to be signed by President Bush soon--which makes it easier for you to sock away retirement savings (CNNMoney.com Aug. 8).

However, the provisions in the Pension Protection Act of 2006 will work to your advantage only if you take advantage of them. Here are some of the provisions that can help you:

Goodbye, sunsets. Previously, the annual contribution limit had been set at $15,000, with annual cost-of-living increases until 2011, when the cap was scheduled to scale back to about $13,000. Now, new legislation makes the current $15,000 limit permanent, with annual cost-of-living adjustments beyond that. The same holds true for IRAs: Both traditional and Roth IRA contributions will keep increasing beyond 2010 based on inflation, and the catch-up provisions are here to stay (TheStreet.com Aug. 9).

The ceiling for adjusted gross income is being eliminated. After 2010, if your adjusted gross income is more than $100,000, you'll be able to convert money to a Roth IRA.

Expect to see more companies offering Roth 401(k)s. The new legislation eliminates the sunset on them, too, lifting the cloud of uncertainty about whether these new products--introduced in January 2006--had a viable future. They let you designate part or all of your 401(k) contribution to a Roth IRA, with tax-free withdrawals in retirement.

Expect to see more employers automatically enrolling employees into 401(k) plans, addressing concerns that many workers aren't taking the initiative to enroll themselves. Instead, if your employer automatically enrolls you, you'll have to take the time to opt out if you don't want to contribute.

Starting in 2008, the new legislation will make it easier for you to roll retirement funds from a qualified retirement plan to a Roth IRA. Previously, you had to roll it into a traditional IRA because only IRA money could be rolled into a Roth IRA. Now the middle step is eliminated. The tax consequences aren't eliminated, though; you'll still owe tax on the 401(k) money (pre-tax dollars) that you roll into the Roth IRA (after-tax dollars), and then that money and its earnings can grow tax-free.

The legislation will allow non-spouse beneficiaries to receive rollovers of retirement funds upon a person's death--a big perk for same-sex couples.

An Aug. 3 statement by AARP CEO Bill Novelli cited several improvements as well as concerns with provisions in the legislation. He applauded the permanent extension of the Savers' Tax Credit as a victory for modest income working families who find it difficult to save. But, he said the provisions don't address the decline in defined-benefit plans or the risks facing employees who may receive conflict-tainted investment advice from some financial service firms. They also don't provide additional transition assistance for workers hurt by conversions to cash-balance pension plans.

For more information, read "Introducing the Roth 401(k)--A New Workplace Savings Opportunity" in the Home & Family Finance Resource Center money savvy section.