Free At Last, Free At Last ... Tax Free

On August 17, 2006 President Bush signed into law the Pension Protection Act of 2006. This legislation represents the first comprehensive pension legislation in more than 30 years.

Many of my clients, both individual families and companies, are providing savings for the ever escalating cost of higher education by investing in 529 College Savings Plans. When originally created, these IRS qualified plans allowed for the earnings accumulated to be used specifically for higher education and free of Federal taxes. As part of the Tax Reform Act of 2001, after December 31, 2010 the earnings would again be taxed at ordinary income rates. Now, thanks to this new Act, earnings will be Federal tax-free PERMANENTLY. Please contact me if you would be interested in discussing this further.

J.H. Cohn, LLP, one of New Jersey's leading accounting and consulting firms, has graciously provided the following highlights of the Act.

"IRAs, 401(k) s, other elective plans (SIMPLE plans) and catch-up contributions available to people age 50 and over have been made permanent. Legislation enacted in 2001 increased various contribution limitations over several years through 2010. However all of these increases were scheduled to sunset as of January 1, 2011. For example, in 2001 IRA contributions were limited to $2,000. For 2006 the maximum IRA contribution is $4,000 and will increase to $5,000 in 2008. Without this legislation the limit would have reverted back to $2,000 in 2011.

Roth 401(k) s. This provision of the tax code first became effective in 2006. Many employers were reluctant to offer Roth 401(k) s because they would have expired after 2010. The new law makes them permanent and this should encourage more employers to offer them.

Section 529 plans (qualified tuition programs) have been made permanent under the new law.

New and enhanced incentives. The pension reform law also creates some new incentives. You can ask the IRS to deposit your tax refund into an IRA (effective for 2007). The new law also allows direct rollovers from a qualified retirement plan, tax-sheltered annuity or government plan directly to a Roth IRA and will treat it as a Roth conversion if all other qualifications are met (effective for 2008). In another important development, non-spousal beneficiaries can roll over their interests in a qualified retirement plan, government plan or tax-sheltered annuity into an IRA (effective for 2007). Previously, this treatment was only available to spouses. The new law also allows IRA and 401(k) providers to offer personalized investment advice (starting in 2007).

New rules for charitable donations. Effective for tax years beginning after August 17, 2006, no deduction will be allowed for any contribution of cash, check or other monetary gift unless you can show a bank record or a written communication from the charity. This means you will need to either get a receipt for every cash donation you make or you should make your donations by check, credit or debit card, so your bank statement will show it.

Household items and clothing must be in "good condition" to be deductible. Otherwise, no deduction is allowed. There is a limited antiques exception for donated single items appraised at more than $500. The IRS is expected to issue guidance about what is "good condition" in time for the filing of 2006 tax returns as this change is effective for contributions made after August 17, 2006.

While the new law imposes restrictions on contributions of cash, household goods and clothing, it expands some other deductions. For example, individuals age 70 1/2 or older will be able to make a tax-free distribution of IRA proceeds up to $100,000 to a charitable organization through December 31, 2007. The new law also increases the deduction limits for qualified conservation easements for 2006 and 2007."