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Retirement Planning > Saving for Retirement > IRAs

The PPA in plain English

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The Pension Protection Act of 2006 (PPA) is a step in the right direction, both by shoring up standards for defined benefit pension plans, and by making permanent (if there is such a concept in Congress) many of the changes found in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

For the average investor, as well as advisors serving this market, the repeal of the “sunset provisions” is probably the most important aspect of this Act. Prior to PPA, many of the increased contribution limits available to an investor when funding his retirement accounts were set to expire in 2011. Under PPA, this is no longer the case. Some highlights regarding these limits include:

Employee deferral limits: The employee deferral limit for 401(k), 403(b), and 457 plans for 2007 is $15,500, and will be indexed for inflation each year thereafter.

Age 50 catch-up: Starting the year one turns age 50, EGTRRA allowed an additional “catch-up” contribution for 401(k), 403(b), 457, IRA, and SIMPLE plans. This has been made permanent, and currently 401(k), 403(b), and 457 plans allow an additional $5,000 contribution amount, with IRAs allowed an additional $1,000 and SIMPLEs an additional $2,500.

Increased IRA and Roth IRA contribution limits: The contribution limit for IRAs will increase to $5,000 in 2008 (from $4,000 in 2007), and then will be indexed for inflation going forward.

Roth 401(k) and 403(b) plans: These employer-sponsored Roth accounts are now permanent, and they allow individuals to contribute up to $15,500 in 2007 (and an additional $5,000 with the age 50 catch-up provision). Roth IRAs have lower contribution limits ($4,000 in 2007) and phaseouts for individuals based upon their adjusted gross income. There are no phaseouts for the Roth 401(k) and 403(b).

Section 529 plans: The ability to take tax-free withdrawals from a Section 529 plan for qualified educational expenses has been made permanent.

These permanent changes are good for investors, and good for advisors. However, advisors need to be aware that the Pension Protection Act will also increase competition.

Prior to PPA, employers did not want to get involved with offering investment advice to their employees, primarily because of liability concerns. Now there is a limited exemption available that allows employers to make arrangements for investment advice to be provided, and the employer’s liability is limited as long as a few guidelines are followed. IBM recently announced free financial planning for its 127,000 U.S. workers, and a major component of this planning is helping employees with their 401(k) plans.

As more companies take advantage of this new exemption, an advisor may very well find out that his potential clients (and even current clients) are already speaking with an advisor.


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