Hidden Gems in Pension Reform Bill: “Permanent” Tax Cuts and Other Features

From Bloomberg, in an article that requires some wading through some anti-administration bias:

Bush has triumphed by gaining without a fight permanent status for more than 50 tax cuts, said Clinton Stretch, director of tax policy at the accounting firm Deloitte & Touche LLP in Washington. He has yet to win that status for lower rates on marginal income, dividends and capital gains.

The most significant of the breaks include higher annual caps on retirement-account contributions; a guarantee that gains in so-called “529″ state-sponsored college tuition accounts will be exempt from federal taxes; a tax credit matching deposits by low-income Americans in retirement accounts; and the Roth 401(k), which provides tax-free income in retirement.

Though nothing in the law is truly “permanent,” it will literally take an act of Congress to change any of the above, which is a nice change from the scheduled-expiration situation these items were previously in.

The takeaways from this are:

• You don’t need to worry that the tax breaks for college 529 plans will disappear without a serious fight that I doubt the tax-increasers could win.
• The Roth 401(k)’s “permanence” should encourage many employers who were holding back to include that feature in their existing 401(k) plans. In “traditional” 401(k) situations, contributions are made pre-tax (effectively meaning that you get a deduction for your contributions), and distributions from the plan during retirement are taxed. In a Roth situation, there is no tax break at the time contributions are made, but distributions during retirement aren’t taxed at all. The math can be complex, but in general, the younger you are, and the more aggressive investor you are as an investor, the more likely it is that making Roth instead of “traditional” 401(k) contributions will leave you better off in retirement.