Retirement legislation highlights
December 30, 2008
A number of laws have been created in recent years to help workers save for retirement. Examples include the Economic Growth, Tax Relief Reconciliation Act (EGTRRA) of 2001, the Pension Protection Act of 2006, and the Worker, Retiree and Employer Recovery Act of 2008.
This legislation has created and extended important benefits related to 401(k) and other retirement plans, as well as IRAs.
We’ve highlighted some key provisions below to help you understand how the new laws may affect you.
- Required minimum distributions suspended for 2009. Retirement plan participants, IRA owners and beneficiaries who are subject to minimum distribution rules will not be required to take a distribution for 2009. If you postponed your 2008 distribution until 2009, you still must take it by April 1, 2009.
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Higher plan contribution limits. The phased increases in contribution limits and catch-up contributions for participants age 50 and older introduced in EGTRRA will not expire in 2010, as previously scheduled.
Plan type 2009 Annual limit* 2009 Catch–up amount* 401(k), 403(b), 457, SARSEP $16,500 $5,500 SIMPLE $11,500 $2,500 - *
- Amounts will be adjusted for inflation in $500 increments in subsequent years.
- Faster vesting. Employer nonelective contributions must vest on a six-year graded schedule or after three years of service.
- Employer stock diversification. Plans must allow participants investing elective deferrals and after-tax contributions in employer stock to diversify those investments at the time of purchase. Participants with three years of service must be allowed to diversify employer matching contributions invested in employer stock. Diversification for existing employer stock must also be phased in over three years (except for qualified older employees).
- Roth 401(k)/403(b)s. The ability to accept Roth contributions in 401(k) and 403(b) plans will not expire in 2010, as previously scheduled. Also, you can roll your Roth balance into a Roth IRA in the year you are eligible to receive the distribution, regardless of your income.
- Direct rollovers to Roth IRAs. You can roll your qualified retirement plan account balance directly into a Roth IRA if your modified adjusted gross income (MAGI) is $100,000 or less. Government 457 plan and 403(b) accounts can also be rolled into a Roth IRA. The MAGI limit will be eliminated in 2010.
- Rollovers by non-spouse beneficiaries. Non-spouse beneficiaries, if allowed by the plan’s terms, may transfer retirement plan account balances to “inherited IRAs.” (Spouse beneficiaries already have this right.) Because some plans pay death distributions immediately, such transfers could provide a tax benefit. Distributions from an inherited IRA — along with taxes on the distributions — can be spread out over time. Plans must allow non-spouse beneficiary rollovers in 2010.
- IRA distributions to charities. For the 2008 and 2009 tax years only, IRA owners age 70-1/2 or older can make a tax-free donation directly to a charity of up to $100,000 from an IRA instead of taking a taxable distribution. The tax-free donation can be counted toward satisfying the required minimum distribution (RMD) for 2008. RMDs are not required for 2009.
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IRA contributions and catch-up amounts. The phased increases in contribution limits and catch-up contributions for IRA owners age 50 and older introduced in EGTRRA will not expire in 2010, as previously scheduled.
Year Annual limit* Catch–up amount* 2008 $5,000 $1,000 2009 $5,000 $1,000 - *
- Contribution limits will be adjusted for inflation in $500 increments in subsequent years.
We’ll continue to keep you informed on the impacts of new legislation as details become available.
Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus and/or summary prospectus, which can be obtained from your plan’s financial professional or downloaded and should be read carefully before investing.