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Pension Protection Act 2006
The Senate and the House of Representatives passed a tax law with the aim of strengthening pension funds in additions to scores of other tax changes. President George W Bush signed the bill in law in August 2006 and it is known as Pension Protection Act, 2006. |
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The main design of the Pension Protection Act 2006 is to force employers to build up their pension plans. Many pension plans are underfunded which will result in giving out more pension benefits than the available funds in the plan. The Pension Protection Act 2006 will make ensure that pension plans get fully funded over a 7 year period starting from 2008. However, in order to ensure that the pension gets fully funded, the Pension Protection Act 2006 allows employers to deduct the cost of making additional payments to the pension plan. The Act also has very strict funding guidelines and employers who do correct the pension funding will have to pay a 10 percent excise tax.
In addition to this, the Pension Protection Act 2006 provides over 20 tax benefits for other retirement pension plans. This means that employers cannot automatically sign up their employees to join a 401k retirement plan with default contributions. Employees can opt out of a 401k plan if they do not want it.
Further, the Pension Protection Act 2006 now allows a direct rollover from 401k to Roth IRA and the rollover is treated as Roth. There is also a new provision for non-spouse beneficiaries. Non-spouse beneficiaries can rollover assets they receive from a retirement plan into an IRA. This way the non-spouse beneficiary will not pay tax for the rollover but will end up paying taxes when the assets are withdrawn. Earlier, this benefit was limited just to spouse beneficiaries.
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