Will the new pension reform law give income planning more punch as advisors try to make sure clients have sufficient retirement income? Some planners were contacted to find out.
H.R. 4, the Pension Protection Act of 2006, was signed into law by President Bush on Aug. 17, 2006.
“Income planning has a direct correlation to income accumulation,” and the new law will help with saving, according to Tom Foster, national spokesperson for The Hartford Retirement Plans Group, Simsbury, Conn.
Some major changes that will power up the income plan include making the Roth 401(k) and Roth 403(b) permanent, says Foster. So will eliminating the possibility of a return to the old contribution limits. The baby boomer catch-up provision is now permanent as well. A $2,000 saving credit that helps lower-paid employees is now also being made permanent, he continues.
Automatic enrollment in 401(k) plans, allowed under the new law, will not only increase what contributions lower-paid employees can make; it will also allow highly compensated employees to contribute more since the amount they can contribute is tied to what the average-paid employee contributes, according to Foster.
For the automatic enrollment provision, the new law preempts state laws under a safe harbor test, he adds.
Uncertainty about the future of tax rates makes it desirable for many in higher income brackets to convert to Roth IRAs, says Foster. Under this new law, starting in 2008, those with under $100,000 in adjusted gross income can take money from a qualified plan and put it directly into a Roth IRA, he explains. And, after 2010, there will be no AGI limit to prevent people from making these conversions, he adds. However, those who are eligible to take distributions and decide to convert will need to move money from a qualified plan into a traditional IRA and then into a Roth IRA.
During a two-year window starting in 2011 and 2012, a “very important” feature becomes available. This is the ability to spread tax liability for the conversion over these two years. After 2012, the full liability is charged when the conversion is made, Foster says.
The new law also allows for a combined 401(k)/defined benefit combination product to be offered, with the flexibility and guarantees associated with each product, Foster notes.
Additionally, starting in 2007, tax refunds can be directly deposited into an IRA, he continues. Also, those over age 70.5 can make a tax-free contribution to a charity from an IRA if the amount is no larger than $100,000, he says.
“The new law is very helpful, but I don’t know if it will address the problem,” says Bill Knox, a financial advisor with Regent Atlantic Capital, Chatham, N.J. It is helpful because it makes changes made in EGTRRA permanent and offers some “rare pre-tax opportunities.”
But even with the changes in the new law, Knox has some “pessimism about what it will take to wake this country up about what it takes to retire.” After accounting for inflation, the greatest return that consumers can realistically hope for is 4%-5%, he says. Meanwhile, consumers are not currently saving enough, Knox continues.
One benefit the new law offers, he says, is the ability to extend tax-free rollovers in 401(k) plans to beneficiaries who are not spouses. This will be helpful in income planning, according to Knox.