Finally! I'm fulfilling my promise made after the Senate's late-night vote last week to pull together the tax provisions that lawmakers considered before they headed out of town. But I'm revising the structure and timetable (again) a bit.
I've been looking through the pension bill that passed last Thursday night, along with various analyses of it -- yes on a Saturday; don't I live the exciting life?! -- and have discovered there's a lot of tax stuff in there.
Specifically, we're talking 100-plus tax provisions in around 1,000 pages of legislation, discussed in a 376-page committee report. Of course, not all of those apply to individual taxpayers. Thank goodness!
But there are more than enough to fill up several blog entries. So that's what I'm going to do. Instead of the one previously-promised posting, I'm going to spread it out a bit. You'll thank me later!
In keeping, however, with my earlier analogy of the latest legislative doings, I'll break this tax examination into three parts:
- The (mostly) good: Tax provisions that passed. These will actually be two separate blog posts. In this first one, I'll look at those related to retirement plans, as you would expect from a pension bill. My next post will be on new tax provisions related to charitable giving.
- The bad: Tax provisions we're waiting on. This is the long-promised revival of several popular tax breaks that expired on Dec. 31, 2005.
- The ugly: Outrageous tax provisions that were offered (and might show up again) in an effort to woo votes. Also known as legislative bribes to colleagues.
So with my fun-filled Saturday night rapidly winding down, let's get started on good tax breaks, part 1.
IRAs forever: Many of the laws governing tax-favored accounts like IRAs and 401(k)s were set to expire in 2010. That's no longer an issue. As soon as W signs the pension bill into law, an action expected very shortly, the rules will be permanent, or at least as everlasting as you can expect from a legislative system that encourages constant meddling with existing laws. But for the foreseeable future, here's what to expect.
IRA contribution limits will stay at $4,000 through 2007, go to $5,000 in 2008 and then be inflation adjusted thereafter. The $1,000 catch-up provision for 50-or-older workers also was made permanent, but it is not indexed for inflation.
Workplace accounts: As for 401(k)s, you'll be able to keep putting up to $15,000 a year in these employer-sponsored plans. I'd love to know how many people -- and just who they are -- get even remotely close to this ceiling. But I suppose we all need a goal to shoot for.
To encourage more of us to start working toward that maximum 401(k) contribution level, companies now can automatically enroll new employees in the plans unless the workers opt out. Yeah, it is a bit paternalistic and not a perfect solution, but I believe it's generally a good idea.
Too many people never even think about signing up, despite good intentions. At least now, many will start putting money into an account. If they find they really need the money for day-to-day expenses, they can stop contributing.
You'll also be able to get investment advice on your 401(k)s. Advice is good; more information to make better investment choices is always welcome.
Sales pitches, however, are not good. Neither are high fees to get the advice. The new soon-to-be law says that the investment advice arrangements must ensure that any fees, including commissions, are not dependent on the investment option you chose.
We'll see how this works in actual practice. JLP over at AllFinancialMatters has his doubts.
Increased IRA mobility: Bouncing back to IRAs, starting in 2007 you can have your tax refund directly deposited into your retirement account. Of course, that's what you were doing with that money, anyway, right? So now this saves you a step.
Beginning in 2008, you'll be able to roll your company savings plan funds directly into a Roth IRA, as long as you meet all other Roth requirements. Previously, to move your 401(k) to a Roth you had to first put it in a traditional IRA and then convert it to a Roth.
The regular-to-Roth conversion rules remain; you'll owe taxes on the untaxed contributions and earnings you move over. But at least that now will all be figured in one fell swoop.
Credit where credit's due: The Savers Credit also was made permanent. This tax break, created to reward lower-income workers who put money into a retirement account, was set to expire at the end of this year.
Now eligible workers can continue to get the credit (details on how it works here). Plus, starting next year, the income level to determine eligibility and actual credit amounts will be indexed for inflation.
Continued college tax consideration: And finally, the new law continues the federal tax exemption for Section 529 plans. These college savings plans have become very popular, in large part because you can withdraw the funds tax-free to pay school costs. That break had been set to expire at the end of 2010.
With the tax-free option now in full and perpetual force, you shouldn't have to tap your own retirement account to keep Junior enrolled at State U.
That's all for now. Coming up next, how the new tax laws will affect your philanthropic efforts.