Module 1 - An Overview of Retirement Planning.docx

The first trend is a reduction in taxation benefits

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The first trend is a reduction in taxation benefits. At one point, pension benefits received extremely favorable tax treatment. For example, they were once not subject to estate taxes. This is no longer the case. Each favorable tax treatment has been gradually removed so that today, pension benefits are taxed as ordinary income (just like earned income). This trend clearly has benefited the federal government more than the pension recipients. The second trend relates to the use of IRAs. At the time that ERISA was enacted, IRAs permitted very limited contributions. Their boundaries have gradually been expanded to encourage more private saving. Now, investors benefit from higher contribution limits and the introduction of Roth IRAs. The third trend is related to the second and it deals specifically with contribution limits. Immediately following the passing of ERISA, legislation began to appear that limited deductible contributions for highly compensated employees. This legislation had the effect of increasing the use of non-qualified deferred compensation plans. In 2001, this trend began to change and the income limits were gradually made less restrictive. This was done to both encourage saving and to incentivize small business owners to open plans. An ongoing trend has been to give all business types equal access to employer-sponsored retirement savings plans. A fourth trend has been the limits placed on tax deferral. The federal government realized that the tax inducement to save in a retirement plan was tremendous and that the government was losing out on a revenue source for too long a period of time. In 1986, legislation was passed that requires distributions to begin by the attained age of 70 ½ to correct this revenue oversight. A fifth trend relates primarily to small business, but they are also applied to other business types. To ensure that small business owners were not giving themselves retirement benefits to the exclusion of their rank-and-file employees, top-heavy rules were instituted. We will discuss these in detail in a later lesson, but they essentially prevent discrimination. Another rule inspired by small business abuses is the affiliation requirements. Some businesses were forming separate entities to avoid retirement regulations. Now, they must aggregate all related businesses with common ownership to eliminate this loophole. People can be very creative and as new loopholes are found, new regulations will likely emerge to plug the leaks. Pension Protection Act of 2006 The Pension Protection Act (PPA) of 2006 was signed into law by President George W. Bush in August of 2006. This is the most significant and impactful piece of pension legislation since ERISA in 1974. It was designed to enhance protections for employer-sponsored plan participants and to improve the pension system in general.
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