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New Tax Law Makes It Easier to Save for Retirement
The new tax law will allow Americans'”especially older workers'”to contribute more to tax-deferred retirement plans.
Under the old law, the most you could contribute to a traditional Individual Retirement Account (IRA) or a Roth IRA was $2,000 a year. Under the new law, this limit will rise to $3,000 a year in 2002, $4,000 a year in 2005, and $5,000 a year in 2008.
Also starting next year, the government will provide a tax credit to low-income workers who contribute to a retirement plan at work. Married persons with gross incomes of $50,000 or less, or singles with incomes of $25,000 or less, are eligible. The lower the income, the higher the credit.
The allowable limits on contributions to 401(k), 403(b), 457 and salary-reduction type of Simplified Employee Pension (SAR-SEP) will also rise. Generally, $10,500 is the most that can be put into these plans now on a pre-tax basis. Under the new tax bill, the limit will increase to $11,000 in 2002 and then go up by $1,000 each year after that until it reaches $15,000 in 2006. At that point, the annual limit will rise with inflation, but only in increments of $500 a year.
Workers 50 or older will be able to contribute
even more to such plans. Older workers may set aside an additional $1,000 next
year, an additional $2,000 in 2003, an additional $3,000 in 2004, an additional
$4,000 in 2005 and an additional $5,000 in 2006 and beyond.
The new law also makes it easier for those
changing jobs to shift funds from one type of retirement plan to another.
Starting in 2002, employees will be able to move money freely between and among
401(k), 403(b) and similar plans. Also, "after-tax" contributions to
401(k) or similar plans will generally be transferable to a traditional IRA or
another retirement plan.