Published February 2002

New tax law gives retirement savings a boost

As 2001 came to an end, it brought all of us in the work force one year closer to retirement. Of course, that day may still be a distant reality for you, but you can never be “prepared enough” for it. Now, thanks to the Tax Relief Act of 2001, you’ve got a great opportunity to give your retirement savings a boost.

When the new tax laws were passed last June, most of the media attention focused on the reductions in marginal tax rates and the one-time tax rebate. But other changes were enacted, too — and some of them may prove even more important to people saving for retirement. Specifically, the new laws have increased the contribution limits for IRAs, 401(k)s and other types of employer-sponsored retirement plans.

How much more can you contribute to these plans? Let’s take a look:

• Beginning in 2002, you can contribute up to $11,000 to your 401(k) or 403(b) plan, up from $10,500 in 2001. And this contribution ceiling will gradually rise over the next several years, eventually reaching $15,000 in 2006. After that, the annual contribution limit will be indexed for inflation.
• Starting in 2002, you can contribute up to $3,000 per year to either a traditional or Roth IRA — up from the current $2,000 limit. From 2005 through 2007, you can contribute up to $4,000 per year. And in 2008, you will be able to contribute $5,000 per year. After that, your contribution limits will be indexed for inflation.

While these higher contribution limits clearly benefit everyone interested in building their retirement savings, workers age 50 and older now enjoy an even greater advantage. That’s because the new tax laws contain “catch up” provisions that allow these workers to exceed the new contribution limits.

Starting in 2002, workers 50 and older can contribute an extra $1,000 per year to their 401(k) or 403(b) plans. This “catch up” allowance will increase by $1,000 per year until it reaches $5,000 in 2006 (after which it will be indexed for inflation).

“Catch up” contributions also will be allowed for IRAs.

Starting in 2002, those 50 and older before the end of the taxable year can contribute $500 more than the annual limits placed on both traditional and Roth IRAs. This amount will increase to $1,000, starting in 2006.

All these higher contribution limits will benefit you in at least two key areas:

• Increased retirement savings — With higher contribution limits, you’ll be able to put away more each year for retirement. Over time, these increased contribution limits can add up to a significantly higher level of savings for you. Plus, your 401(k) and IRA contributions will grow on a tax-deferred basis, which means more of your money will be working harder for you.
• Potential reduction in income taxes — Generally, you make 401(k) and 403(b) contributions with pre-tax dollars; consequently, the more you contribute the lower your taxable income. In addition, depending on your individual situation, you may also be able to lower your tax bill by making a tax-deductible contribution to a traditional IRA. (Double-check with your tax adviser.)

As you can see, the new 401(k) and IRA contribution limits can really help give your retirement savings a boost in the right direction. Make it a New Year’s resolution to start taking advantage of them today!

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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