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New legislation impacts financial planning

In August, Congress passed the most comprehensive pension legislation in more than 30 years. The provisions in the law are wide-ranging, focusing to a large degree on how companies must handle their pension plans in the future.

But the new law (The Pension Protection Act of 2006), signed by the President Aug. 17, also includes several provisions that you will want to know about—changes that may, in fact, influence your financial planning.

Contribution limits and bonus contribution limits for those age 50 or older, available to owners of IRAs and 401(k) and other similar plans, were set to expire at the end of 2010 but have been made permanent. As a result, after 2010, contributions stay at the phased-in higher levels and will be adjusted for inflation.

For participants whose employers have adopted the new Roth 401(k) plan, the news is they can continue to designate their contributions as Roth IRA contributions.

Another provision in the new law allows taxpayers to have their federal income tax refund deposited directly into an IRA. Details regarding the direct-deposit process haven’t been spelled out as yet. IRS will be establishing the necessary procedures, and it’s likely to require some new tax forms.

Another change has an effect on non-spouse beneficiaries of a retirement plan account. These beneficiaries now will be allowed to roll over assets from a company retirement plan into an IRA. The beneficiary avoids tax as a result of the rollover, being taxed only when the assets are withdrawn from the IRA. Previously, only a spouse was entitled to this tax treatment.

Researchers have consistently found that a 401(k) plan that calls for employees to be enrolled automatically in the plan boosts substantially the rate of plan participation — perhaps to levels going as high as 95 percent.

The new law makes it easier for employers to enroll workers automatically in their 401(k) plans and also to increase automatically by 1 percent a year the common deduction of 3 percent that many employees designate to come from their paychecks. The purpose of this provision is to keep contributions in line with pay increases. These changes become effective officially in 2008.

A new law allows IRA owners to make up to $100,000 in tax-free distributions from their IRAs when the distribution is made for charitable purposes. The rule applies only for the remainder of this year and next. This opportunity is available to both traditional and Roth IRA owners who are age 70 1/2 or older. However, no charitable deduction will be allowed for a distribution or portion of a distribution that is taxable for some other reason.

New rules tighten some of the requirements for deductions of donations to charity. Donors now must keep records of all cash donations — a receipt from the charity, a cancelled check or a credit card statement that will help prove that the donation actually was made. No tax deduction will be available without supporting documentation. There is no need to include receipts with a tax return, but donors need to keep their receipts and other documentation with their tax return in case of an audit.

There are tougher rules for non-cash donations as well. Items donated, such as a car, clothing or household goods, must be in good condition.

There is good news for parents and grandparents looking for ways to save for their offspring’s higher education.

Money placed in state-sponsored Section 529 college savings plans grow tax deferred and may currently be withdrawn tax free. But the ability to make tax-free withdrawals was set to expire at the end of 2010. Now this opportunity has been made permanent.

Jeff Francis is senior vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other personal finance issues, call 865-971-2321 or visit you local First Tennessee financial center.


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