William Penn Life, 2001 (36. évfolyam, 1-12. szám)
2001-12-01 / 12. szám
What a relief New tax law offers advantages to those saving for retirement from CPA Client Bulletin People who recognize the importance of saving for retirement should be able to find a lot to like in the recently enacted Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It increases overall contribution amounts to 401 (k)s and other types of retirement plans, and it even helps those who are 50 or older who need to make up for lost time. Most of these increased contribution limits take effect on Jan. 1,2002 (and continue to rise for several years thereafter), so now is a good time to review the changes and plan what you should do to take full advantage of the contribution amounts. IRAs. IRA contribution limits for both traditional and Roth IRAs will increase from a $2,000 annual cap to $5,000 by 2008. For 2002-2004, the contribution amount is $3,000. To address a general concern that baby boomers haven't saved enough for retirement, starting next year, individuals 50 years of age or older can make tax-free "catch-up contributions" to the IRAs. If you're age 50 or older, you can contribute an extra $500 in 2002 through 2005, and an extra $1,000 in 2006 and beyond. 401 (k)s. Salary reduction contributions to 401 (k)-type plans-including 403(b) plans and SEPs—will increase from $10,500 to $15,000 by 2006. In 2002, the contribution limit increases to $11,000 and will increase by $1,000 each year until 2006. After that, the annual limit may rise with inflation in increments of $500 per year. Catchup rules for employer-sponsored plans allow participants age 50 or older to contribute an additional $1,000 in 2002, rising to an additional $5,000 by 2006. Defined Contribution Plans. Effective for tax years beginning after Dec. 31,2001, the dollar limit on annual contributions to a defined contribution plan will increase to $40,000. Defined Benefit Plans. The annual limit on benefits under a defined benefit plan will go up to $160,000 for taxable years ending after Dec. 31, 2001. SIMPLE Plans. The limit on maximum annual elective deferrals to a SIMPLE plan will increase to $10,000 by 2005. For 2002, the applicable dollar amount is $7,000. After 2005, the dollar limit will be adjusted annually for inflation in $500 increments. Tax Credits. The legislation also gives lower-income workers a tax credit, instead of a tax deduction, for contributions made to a retirement savings account or plan for years 2002 to 2006. Joint filers earning less than $30,000 will be entitled to the maximum 50 percent credit, which phases out completely for those with adjusted gross income (AGI) over: $50,000 if married filing jointly; $25,000 if single; and $37,500 if head of a household. New Vesting Rules. Starting in 2002, companies offering employer-matching contributions to 401 (k) plans must fully vest their workers after three years, down from five years under previous law. Alternatively, the company can start gradual vesting beginning with the employee's second year of service, with full vesting after six years of service, down from seven. Lawmakers are hoping that the shorter vesting periods will encourage greater participation by employees who don't expect to remain with a company for more than a few years. New Rollover Rules. Beginning in 2002, the new law allows workers who switch from the public to the private sector, or vice versa, to roll over money into another type of plan. For example, a nonprofit worker with a 403(b) who takes a job in the private sector, can transfer his or her balance into the new employer's 401 (k) plan. In addition, EGTRRA should make it easier to roll over money that was originally contributed to an IRA into an employer-sponsored plan, such as a 401(k), 403(b) or 457 plan. However, keep in mind that tax law does not require plans to accept rollovers. The changes made by the new tax law are extensive and may seem overwhelming. However, make every effort to take advantage of them, especially the increased contribution limits for retirement accounts. This alone can make a big difference in your tax bill next year. Copyright (c) 2001, American Institute of Certified Public Accountants, Inc. Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881. Honey Links For more information about the new tax law and how it affects you, log onto the IRS “News for You 2002” web page at http:// www.irs.gov/news/foryou/ index.html 4 Willi» Pen Lile, December 2001
