By Sandy LeDuc
LeDuc and Sikowitz
Clearly the country has confirmed its commitment to employees' retirement savings through its support of salary deferrals in 401(k) and SIMPLE plans. This commitment is supported by final 2001 Economic Growth and Tax Relief Reconciliation Act. In addition to higher overall limits, contributions have been raised another notch for employees over 50 years of age to give them an opportunity to catch up as they get closer to retirement.
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) have long represented an option to taxpayers who have had no access to a deferral plan or wanted to supplement employer plans. A taxpayer can make deductible contributions of 15% of compensation up to $2,000. If an individual or spouse is covered by an employer plan, the $2,000 deduction limit is phased out depending on income. Non-deductible contributions allow for tax-deferred savings even if the AGI test phases out a deduction. Subject to certain income limitations the contribution can be made to a Roth with after tax dollars and, so long as certain conditions are met, will never be taxed.
The Act will increase IRA limits beginning in 2002 when they will go up to $3,000 in 2002, $4,000 in 2005 and $5,000 in 2008 and thereafter. Those taxpayers over 50 can add $500. All the increased limits apply to the Roth and nondeductible contributions as well.
Qualified Plan IRA Features
Beginning in 2002 employers will be able to add an IRA feature (traditional or Roth) to certain qualified plans to make supplemental retirement savings easier for employees.
401(k), 403(b) or Salary Reduction SEPs
Employees' pre-tax deferrals to these plans will go up to $11,000 in 2002 and will increase by $1,000 per year until 2006 when the limits will reach $15,000. Thereafter, they will be adjusted for inflation. Older individuals can add of $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005 and $5,000 in 2006 and thereafter.
SIMPLE
Employee deferrals will be raised from $6,500 in 2001 to $7,000 in 2002 and will increase by $1,000 per year until 2005 when it will level out at $10,000. Catch-up contributions for older individuals are identical to those for 401(k) plans.
This Act has provided taxpayers with better mechanisms for savings than have been available anytime in the past.
Fall 2001 -Volume 11, Number 4