During August 2006, President Bush signed into effect the Pension Protection Act. The main goal was to strengthen pension funds, and it provided several other tax changes as well. Here is an overview of some of the major tax changes that might affect you.
Employee Education
Many times the responsibility of the financial management of 401(k)s falls on the individual employees. These individuals may lack the time or resources to make an informed decision. Employers are nervous about offering any kind of advice to their employees because of the associated fiduciary liability. The Pension Protection Act requires pension plan administrators to educate their participants about their rights and responsibilities; this includes education about their investment opportunities, as well as the tax consequences of various payout options. There is specific criteria outlining who is prohibited from giving investment advice, as regulated by the SEC. This act also provides protection to the employer as long as they abide by the criteria set forth.
Automatic Enrollment in 401(k)s
To encourage the participation in 401(k) plans and increase retirement security, employers are now allowed to automatically enroll their employees into a 401(k) retirement plan. This means employers are allowed to deduct a default contribution level from their employees’ paychecks. If the employees do not want to participate in the 401(k), they will have to opt-out of the program. Many employers are also adopting a plan where the automatic deferrals increase as the employee’s salary increases.
Direct Deposit of Income Tax Refunds
Taxpayers now have the option to split direct deposit income tax refunds in up to three accounts. In addition to depositing your refund into your checking or savings accounts, it is now possible to directly deposit your income tax refund into your IRA account.
Rollover to a Roth IRA
It is now possible to roll over your 401(k) directly into a Roth IRA. This is an advantage as before you had to first roll your 401(k) into a traditional IRA before you could move it into a Roth.
Non-Spousal Beneficiaries
The new act allows for beneficiaries who are not spouses of the deceased to roll over the assets from a qualified retirement plan into an IRA. This benefit was previously only available to spouses. Non-spousal beneficiaries, such as children, who inherit retirement assets will benefit from this change. Another benefit is that estate planning will become more simplified when planning for non-spousal beneficiaries.
Charitable Contributions
The Pension Protection Act tightened up the rules on charitable contributions. Now, you must be able to substantiate all of your cash contributions either by a bank record or by a receipt from the charity. So, if you are accustomed to throwing some money into the plate at church, you might want to think about writing a check to your church in the future.
The Pension Protection Act also cracked down on the documentation of non-cash contributions. Beginning August 17, 2006, you must keep a detailed list of EVERY item you donate to Goodwill or any other charity. You are no longer permitted to assign a monetary amount to a bag of donated items. In addition, the items you donate must be in “good” used condition or better to qualify for a deduction. Your documentation must include notation of any items in excellent condition vs. good condition, as well as note if any item is new and has never been used.
In the event of an IRS audit, the IRS only uses Goodwill and Salvation Army as guidelines for valuation amounts. To help you assign the correct fair market value to your donated items, we have listed links to both Goodwill’s and the Salvation Army’s donation valuation guides. They are located at:
Make sure you are keeping a list of all the goods you are donating in order to maximize your itemized deductions!
If you would like any further information regarding The Pension Protection Act of 2006, or if you have any other tax related issues, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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