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Nice: Pension Protection Act of 2006

Merry Christmas, pretty baby ... you sure did treat me nice.
I haven't had a toddy this morning, but I'm all lit up like a Christmas tree.
-- "Merry Christmas, Baby," performed by James Brown

If make you elective deferrals to a defined contribution plan (a 401(k), for example), fund a Roth IRA, make deductible contributions to a traditional IRA, or put money aside for a aspiring scholar in a 529 plan, then thePension Protection Act of 2006 (PPA '06) should make you as gleeful as the Godfather of Soul.

The 109th Congress passed PPA '06 on the last day before it took its summer recess. It hailed as an aid to defined-benefit plans, but most Americans will benefit from other aspects of the legislation. Here is a brief overview of some of the goodies.

College Savings Plans: Tax-free distributions from college-savings plans (also known as 529 plans) for "qualified higher education expenses" were scheduled to expire in 2010. Now they have been made permanent so that parents (and grandparents) can better plan for college expenses. The five most important words in the English language are "When you go to college," and a great way to reinforce that message is to fund a 529 plan.

IRAs: PPA '06 changed IRAs is a numbers of ways. There are, at long last, cost-of-living adjustments in the adjusted gross income limits for Roth and deductible Traditional IRA contributions. For tax years 2006 and 2007, required minimum distributions (RMD) can be made tax-free to charities, subject to a $100,000 limit. The catch-up provisions for taxpayers older than 50 will no longer expire in 2010 along with a "saver's credit" of up to $2,000 for qualified individuals. Taxpayers now have the option of depositing a portion of their federal tax refund directly into an IRA. Non-spouse beneficiaries can initiate tax-free IRA rollovers of distributions from employer-sponsored retirement plans. Previously, this option was limited to spouses.

Retirement plans: The Economic Growth and Tax Relief and Reconciliation Act of 2001 simplified the deferral amounts for 401(k), 403(b), and 457 plans; it made them equal (and my job easier). PPA '06 made these changes permanent. More importantly, without PPA '06, deferral levels would have reverted to their 2001 level. Employees can be automatically enrolled in 401(k) plans, and the vesting period for any employer match has been reduced.

PPA '06 is a nice present that will encourage Americans to save more for their retirement.

For more personal finance related Foolishness, check out:

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Fool contributor Buz Livingston, CFP appreciates your feedback and believes that most people benefit from professional advice. His idea of a white Christmas is to walk barefoot on a sandy beach. The Motley Fool has a disclosure policy.


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