In an election year gift to taxpayers, Congress passed and the President signed the Pension Protection Act of 2006 to provide greater security for pension plans and to encourage saving for retirement.

By educating members about the recent changes and the benefits of an IRA, credit unions can use this gift to grow their deposit base, increase IRA program penetration, and help members secure their retirement.

Credit union members will benefit from provisions of the bill that make permanent IRA contribution limit increases and catch-up contributions, and index them for inflation. This ensures inflation will not erode future IRA contributions. We believe many credit union members will choose to make the maximum IRA contribution allowed by law, now that the higher contribution limits enacted in 2001 are permanent.

Credit unions can benefit by making members aware of these higher limits and capture a greater share of their members' IRA contributions. According to Callahan and Associates, only 6.3% of eligible credit union members contribute to an IRA, so it will be a challenge to motivate the remaining members to start making contributions; but these new changes should help. Members fail to make IRA contributions for a variety of reasons. Some choose not to, others say their retirement needs are met through work plans, and others feel they lack the financial resources to contribute. Unfortunately, many of these members would benefit most from making IRA contributions.

While detractors say the higher limits only benefit upper-income taxpayers who already contribute to an IRA, the new Pension Protection Act has a number of provisions for low/moderate-income taxpayers who may not be contributing to an IRA. One such provision is the Saver's Credit.

Set to expire at the end of 2006, the Pension Protection Act made permanent the Saver's Credit for low/moderate-income taxpayers who make qualified retirement contributions, including IRAs, and indexed future income levels for inflation. This nonrefundable tax credit provides a credit up to 50% on the first $2,000 contributed to a traditional or Roth IRA, 401(k), and certain other retirement plans. Single filers with incomes up to $25,000, heads of households up to $37,500, and married couples filing jointly up to $50,000 are eligible for the credit.

Just like missing out on an employer 401(k) match, credit union members who are unaware of the Saver's Credit, or fail to take advantage, are passing up free money for making IRA contributions. From the Federal Reserve's 2004 Survey of Consumer Finances, the Credit Union National Association's Economics and Statistics Department estimates nearly one-third of credit union member households qualify for the Saver's Credit. If these members made traditional IRA contributions they would also be eligible for a tax-deduction, in addition to the Saver's Credit. With the new higher contribution limits, many credit union members may have difficulty finding the funds to make IRA contributions. Credit unions can promote payroll deduction to help members afford IRA contributions, and now with the Pension Protection Act, the U.S. Treasury will help.

Starting with tax refunds for 2006, the Internal Revenue Service (IRS) will expand taxpayers' options for refund direct deposit. Taxpayers using direct deposit may divide refunds among up to three accounts, including IRAs. The deposits are treated as regular IRA contributions and the normal rules apply. The contribution can be made to either a traditional or Roth IRA, although the taxpayer must first establish an IRA.

More than three-quarters of taxpayers receive refunds each year. Last year, the average refund was $2,171 and many use tax withholding as a forced savings plan. Credit unions need to educate their members that they now have one more option for IRAs.

Members who may not have the funds to make IRA contributions when they file can still make a contribution from their refund (the IRS must make the deposit by the April 15 deadline). The member must also give the credit union written notice attributing the contribution to the prior year. We encourage training staff so they can provide routing and account numbers for members' tax forms.

The Pension Protection Act also contains other provisions to benefit credit unions and members.

Starting in 2007, non-spouse beneficiaries can use a direct rollover to move eligible rollover distributions of death benefits from a qualified retirement plan to an IRA in the name of the deceased employee. Currently, only a spouse beneficiary can use a direct rollover or rollover to move funds from a deceased employee's qualified plan. Non-spouse beneficiaries often must take the funds in a lump sum or over a five-year period, denying them the benefits of continued tax deferral.

This change now allows a non-spouse beneficiary to move the money to an IRA in the name of the deceased owner and take payments over the beneficiary's life expectancy, and thereby continue to obtain tax-deferred earnings while spreading the taxable income over the life expectancy. Credit unions should educate their members about the benefits of moving these funds to their credit union IRAs.

Lastly, starting in 2008, eligible rollover distributions from qualified retirement plans can be directly rolled into a Roth IRA if the owner meets the IRA conversion eligibility requirements. Currently, qualified retirement plan distributions must first be directly rolled to a traditional IRA and then converted to a Roth IRA in a separate step. With an increasingly mobile workforce it is important workers roll over funds to an IRA to avoid shortfalls at retirement. Rollovers are equally important for credit unions, as they represent nearly 80% of total IRA contributions. Credit unions need a year-round marketing strategy to capture their members' rollover dollars.

The Pension Protection Act of 2006 provides the biggest improvements in IRAs since the 2001 tax law changes. Credit unions that take advantage of this opportunity by promoting these improvements have the potential to grow their IRA portfolios and help secure their members' retirement plans. Look this gift-horse in the mouth and only your competitors will be doing this promotion.