On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) into law. While EGTRRA has many components, there are a number of very valuable benefits that could help you invest for your financial future.
Larger Contributions to Traditional and Roth IRAs
For many years, the maximum annual contribution to Traditional and Roth IRAs was $2,000. Under the new tax law, the maximum contributions will now gradually increase to $5,000 by 2008. In addition, individuals who have attained age 50 by the close of the tax year can also make "catch up" contributions and add even more money to their accounts. Here's a summary of the new limits.
Year
Maximum Contribution For Individuals Under Age 50
Maximum Contribution For Individuals Age 50+
2001
$2,000
$2,000
2002
3,000
3,500
2003
3,000
3,500
2004
3,000
3,500
2005
4,000
4,500
2006
4,000
5,000
2007
4,000
5,000
2008 and beyond
5,0001
6,000
1Plus inflation adjustment in $500 increments—beginning in 2009.
Beginning in 2002 and running through 2006, certain lower income taxpayers may receive a non-refundable tax credit (not to exceed $1,000) for contributions made to their Traditional, Roth, or Simple IRAs. If your adjusted gross income falls within the levels listed below, you may be eligible to receive the credit.
There's also good news for people who participate in 401(k), 403(b), and 457 plans at work, as these maximum allowable contributions have also risen. Individuals who have attained age 50 by the close of the tax year can add even more money to their account.
Year
Maximum Contribution For Individuals Under Age 50
Maximum Contribution For Individuals Age 50+
2001
$10,500
$10,500
2002
11,000
12,000
2003
12,000
14,000
2004
13,000
16,000
2005
14,000
18,000
2006
15,000
20,000
2007 and beyond
15,0001
20,0001
1Plus inflation adjustment in $500 increments, beginning in 2007.
Employees who participate in SIMPLE and SEP IRA plans can increase their contributions, while small business owners can receive a credit for establishing a plan.
· SIMPLE Plan Contribution Limits
Year
Maximum Contribution For Individuals Under Age 50
Maximum Contribution For Individuals Age 50+
2001
$6,500
$6,500
2002
7,000
7,500
2003
8,000
9,000
2004
9,000
10,500
2005
10,000
12,000
2006 and beyond
10,0001
12,500
1Plus inflation adjustment in $500 increments, beginning in 2006.
· SEP IRA Contribution Limits
Beginning in 2002, an employer may contribute to a SEP up to the lesser of 15% of compensation or $40,000 (up from $35,000) without being included in the employee's gross income. The maximum amount of compensation that may be taken into account is $200,000 (up from $170,000), which effectively makes the contribution limit $30,000 ($200,000 x 15%). Also, an employer's deduction for contributions made under a SEP cannot exceed 25% of the combined compensation paid to participating employees in 2002 (up from 15%).
· Business Owner Tax Credit
Small business owners can now receive a credit for establishing a SEP or SIMPLE IRA plan. Employer's can receive a credit, equal to 50% of the qualified start-up costs (up to a $500 credit for the first year and each of the next two years).
The new laws regarding rollovers go a long way to increase the flexibility and portability of IRAs and other types of retirement plans.
In the past, rollovers were limited only to IRAs and similar types of plans. There is now full portability between 401(k), 403(b), 457, profit sharing, and money purchase plans.
Assets previously contained in governmental 457 plan accounts can now be rolled over into an IRA.
Certain IRA assets can now be distributed and rolled over to qualified retirement plans, such as 401(k)s and 403(b)s.
The new tax law also includes enhancements for people financing education expenses. First, Education IRAs have been renamed. They will now be referred to as Coverdell Education Savings Accounts (CESAs). The contribution limits on CESAs will rise from $500 in 2001 to $2,000 beginning in 2002. In addition, the contribution phase-out range for married taxpayers filing a joint return has increased from $190,000 to $220,000, so more people will be able to take advantage of this valuable savings tool. In addition, there is more flexibility in terms of how CESA assets can be used.
Education 529 Plans have also been enhanced. For complete details on these plans, and how they can be used to help finance education expenses, visit our 529 College Savings section.
Beginning in 2002, the exemption amounts for an estate passing to beneficiaries without incurring any estate tax will increase to $1 million from the current $675,000. This amount will steadily increase to $3.5 million by 2009, and in 2010 the estate tax will be repealed entirely. However, the repeal only applies to the year 2010, unless it's extended by a new tax law. Here's a summary of the estate tax exemption in the coming years.
Speak with your investment professional or tax advisor today. He or she can provide additional information about how to make the most of these changes, given your individual circumstances.
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