Keeping Current
New Pension Law
Offers More Reasons to Save
The Pension Protection Act of 2006 signed into law in August would've gotten a lot more attention if it were called the "Hey! We're Messing With Your 401(k) Plan Act." Fewer and fewer of us have traditional pension plans anymore, which was the main thrust of the 900 pages of legislation. But the laws tweaked 401(k) retirement savings plans and 529 college savings plans too. Here are the highlights of those changes:
- The main change to 529 college savings plans was making them permanent. Their tax-exempt status was set to expire in 2010. This should make them even more attractive because now ALL the earnings derived from saving in a 529 can go toward education rather than taxes.
- The Pension Protection Act now makes it legal for employers to automatically enroll employees in a 401(k) plan. This is probably a good thing, seeing as how a surprising percentage of eligible employees don't take advantage of their plan — even with the company offering matching funds!
- The 401(k) contribution limit — recently expanded to $15,000 — has been made permanent. So, that ensures we should have plenty of opportunity to save and invest in the future.
- The Roth 401(k) has been made permanent as well. The difference between a Roth 401(k) and a traditional 401(k) is huge. With the Roth, we pay taxes now, but don't have to pay taxes on the earnings. It's a nice option if you can afford to pay the taxes now because it makes your retirement even more secure. Not all companies offer the Roth version (perhaps because it wasn't a permanent plan), so if you like the idea of paying less tax in retirement, urge your company to offer it.
- The new law now makes it easier to unload company stock in your 401(k). Plenty of companies match employee contributions with discounted shares of the company's stock. Although, this is nice, the situation leads to employees amassing 20, 30, 40 percent or more of their investments in a single company — a dangerous situation, as companies like Enron have demonstrated. The new legislation should make it easier to sell your company's stock within your plan. If you're disproportionately invested in your company, (more than 10% of your invested assets) look for plan changes that make it easier to invest in different vehicles.
Really the Pension Protection Act is another chapter in the same old story: Your retirement and financial security increasingly depends on you. This law is a modest step toward giving you more power and more responsibility to save.
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