It’s a great time to boost retirement plan contributions

December 14, 2001
As 2001 comes to an end, it brings all of us in the work force one year closer to retirement. Of course, that day may still be a long time away for you, but it’s never too soon to prepare for it. And now you’re in a better position to do just that - thanks to the Tax Relief Act of 2001. When the new tax laws were passed, most of the public attention focused on the reductions in marginal tax rates and the one-time 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 will be able to 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 will clearly benefit everyone interested in building their retirement savings, workers age 50 and over received even more good news. 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 over 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 age 50 and older before the end of the taxable year can contribute $500 more than the regular limits of 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 contributions can add up to a significantly higher level of savings for you. Plus, your 401(k) and traditional IRA contributions will grow on a tax-deferred basis, which means more of your money will be working for you right away.• Potential reduction in income taxes - Generally, you make 401(k) and 403(b) contributions with pretax dollars; consequently, the more you contribute, the lower your annual bill. Depending on your individual situation, you also may be able to make tax-deductible contributions to a traditional IRA, so the more you put in, the lower your taxable income may be. (Check with your tax adviser before making any moves with your IRA.)As you can see, the new 401(k) and IRA contribution limits can help you out a great deal. Start taking advantage of them soon.

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