On August 17, President Bush signed the Pension Protection Act of 2006 (PPA 2006). This legislation is far reaching and will attempt to shore up our nation’s pension system and the government’s Pension Benefit Guaranty Corp. (PBGC) by making changes in the rules that apply to defined benefit pension plans.

The bill will also include several features to encourage retirement savings and makes permanent many provisions of the Economic Growth and Taxpayer Relief and Reconciliation Act of 2001 (EGTRRA) that were scheduled to expire after 2010.

Wachovia Securities is pleased to offer our clients and prospects a summary of this legislation, with particular focus on the items related to Individual Retirement Accounts (IRAs).

There are a number of provisions that impact IRAs.

EGTRRA Provision Made Permanent
Many of the previously enacted provisions of the EGTRRA legislation slated to sunset in 2010 are now permanent. The following EGTRRA provisions are included:

• Increased limits on 401(k) contributions
• Increased limits on IRA contributions
• Increased limits on employee and employer contributions under Code 415(c)
• Catch-up contributions to plans and IRAs for individuals age 50 and older
• Roth 401(k) plans
• Increased limits on includable compensation under Code 401(a)(17)
• Enhanced portability of rollovers among qualified plans, 403(b) plans, governmental 457(b) plans and IRAs
• Distributions from 529 College Savings plans used for qualified higher education expenses are excludable from gross income

This portion of the Act will become effective upon enactment and will be welcomed by investors interested in maximizing their retirement savings.

New Rollover Rules
The Act introduces a number of new rules around IRA rollovers:

• After-tax money can be rolled to a 403(b) plan. Effective Date: 1/1/2007
• Direct rollovers from qualified plans to Roth IRAs will be allowed for eligible individuals. Effective Date: 1/1/2008
• Non-spouse beneficiaries will be eligible to transfer directly money from a qualified plan to an inherited IRA. (Note that the required minimum distribution rules for non-spouse beneficiaries will continue to apply.) Effective Date: 1/1/2007

In all cases, PPA 2006 will make it easier for you to use various strategies that will help build retirement assets for you and your heirs.

Indexed Income Limits on IRAs
The Act will provide for the indexing of income limits for eligibility to contribute, both for Traditional and Roth IRAs. In addition, the following income limits will be subject to cost of living adjustments:
• The income phase-out limits for the deductibility of Traditional IRA contributions
• The income phase-out limits for Roth IRA contributions

This will become effective for tax years after 2006 and will allow larger
numbers of investors to qualify for setting up a Roth or making a
deductible contribution to a Traditional IRA.

Direct Deposit of Tax Return
The Act will allow individuals to direct all or a portion of their federal income tax refund, up to the applicable limits, to be paid directly to an IRA.

While this feature will become effective for tax years beginning after 12/31/2006, there is still much work to do to determine how the IRS will work with IRA Custodians to assure these payments are credited correctly. We are working with our partners at the Securities Industry Association (SIA) to get clarification on these issues but do see this as a viable option
for many younger retirement investors.

Tax Free Distributions from IRAs for Charitable Purposes
The Act provides that up to $100,000 per year in "qualified charitable distributions" can be paid from an IRA directly to a charity. The amount is excludable from gross income for IRA holders age 70 1/2 and older and is effective through December 31, 2007.

While we have focused on the IRA-related legislation thus far, there are certain defined contribution and defined benefit plan changes that warrant mention in this fact sheet.

Auto Enrollment Enhancements
The Act provides a number of provisions to encourage auto enrollment in defined contribution plans. As a result, many plan sponsors are expected to adopt the auto-enrollment feature within their plan. Participation and contribution amounts should increase, resulting in a larger amount available for retirement planning. The bulk of the legislation around this topic will not become law until after 12/31/2007.

401(k) Hardship Withdrawals
The new law will allow for hardship withdrawals by 401(k) plan participants for hardship and unforeseen financial emergencies in connection with a participant’s spouse or dependent.

The Treasury is to issue more guidance on this issue within 180 days of enactment but this is expected to be a welcomed addition to the rules. Going forward, plans will have more options for approving distributions in hardship situations.

Distributions During Working Years
The new law will allow defined benefit plans to offer in-service distributions to plan participants once they attain age 62. This rule becomes effective for plan years beginning after 2006. It will allow older workers to take control of a portion of their retirement assets earlier and will provide greater opportunities for investment diversification.

Funding Requirement for Pension Plans
Over half of the 900-page PPA 2006 deals with the funding issues surrounding defined benefit plans. Congress has focused on trying to improve the levels of funding for defined benefit plans to protect the integrity of such plans for American workers.

The legislation would prohibit a pension plan from increasing benefits in cases where the plan is less than 80 percent funded (unless certain contributions are made immediately) and may require some restrictions on lump sum distributions. Plans funded at less than 60 percent would be prohibited from making lump sum distributions and future accruals.

The PPA 2006 also addresses the valuing of pension plan liabilities and extends the use of investment grade corporate bonds in determining pension liabilities for 2006 and 2007. Starting in 2008, the interest rates used to determine pension liabilities will be based on a new three segmented yield curve. The new law will require most pension plans to become fully funded over a seven-year period.

While these provisions could lead to increased contributions into defined benefit plans as companies begin to comply with the new funding rules, it could also lead to a large number of frozen or closed defined benefit plans and impair the establishment of new plans. They may also make lump sum distributions unavailable for IRA rollovers in certain instances. If you are
eligible for benefits under a defined benefit pension plan, you should pay attention to the pension plan’s funding status since it may impact the amount and form of benefits you will receive.

There are any number of miscellaneous issues that are a part of the PPA
2006 that might have bearing on certain categories of American workers.
We’ve included several items that may be of interest to you, your friends
or family members.

Treatment of Death Benefits from Corporate Owned Life Insurance (COLI)
Death proceeds from life insurance policies are usually tax-free to beneficiaries. In the new legislation, businesses will treat benefits from COLI as income unless the insured was an employee within 12 months of death and certain other requirements are met. Furthermore, benefits paid to a beneficiary must be used to buy back corporate equity or the insured must be a highly compensated employee for the benefits to retain the tax-free status.

This rule affects only those life insurance policies issued after the bill is enacted.

Military Distributions
Military Personnel called to active duty after September 11, 2001 and before December 31, 2007 may make penalty free distributions from IRAs, 401(k)s, or similar plans. The law also permits the owner to re-contribute the amounts withdrawn within two years and thereby avoid taxation on the distributions. This could be a helpful ruling for reservists or active
military personnel who have faced financial hardship during this period.

Penalty Free Withdrawals for Public Safety Employees
The rules provide for a new exception to the 10 percent penalty for early withdrawal, for distributions from government plans for employees who separate from service after age 50. The rule applies to police, firefighters and individuals who provide emergency medical services and will be effective upon enactment of the Act.

At Wachovia Securities, we understand the importance of keeping investors advised of legislation like PPA 2006. Contact your Financial Advisor to help determine the impact these rules may have for your retirement future.