The 2001 Tax Cut

Retirement Savings

An increase in the $2,000 limit for IRA contributions has been long overdue. The new tax law gives us this increase, and much more. Here's a summary of some of the many provisions of this law affecting retirement savings.

Over 50: Provisions for individuals "over 50" apply to individuals who reach age 50 by the end of the year. If your birthday is in 1952, you're eligible in 2002 even before you reach your birthday. The IRS generally treats people born on January 1 as if they reached the relevant age at the end of the preceding year, so individuals born January 1, 1953 should be eligible in 2002 also.

IRA Contributions
The dollar limit for contributions to traditional IRAs and Roth IRAs will increase from $2,000 to $3,000 beginning in 2002. In 2005 the limit goes to $4,000 and in 2008 it goes to $5,000. After that the limit is adjusted for inflation.
    People age 50 or older by the end of the year are allowed an additional $500 per year beginning in 2002 and an additional $1,000 per year beginning in 2006. Here are the new contribution limits:

401k and SIMPLE Contributions
Contribution limits for these plans will increase as well. In the following table, the amount allowed for 401k plans applies also to 403b annuities, SARSEPs and 457 plans:

Catch-Up Contributions
Beginning in 2002, individuals age 50 or older by the end of the year can make "catch-up" contributions to 401k, 403b, 459, SEP or SIMPLE plans if their contributions would otherwise be limited � even if the limitation arises from nondiscrimination rules or a limit based on percentage of compensation.

Employer-Sponsored IRAs
Beginning in 2003, employers will be able to offer "deemed IRAs" under their retirement plans. These can be traditional IRAs or Roth IRAs and will be treated essentially the same as an IRA established separately by the employee.

IRA Withdrawals for Charitable Purposes
A proposal to permit tax-free withdrawals from IRAs for charitable purposes was not included in the final version of the law.

Limits on Employer Plan Benefits
Employers will be able to offer more generous retirement benefits beginning in 2002. The $35,000 limit for defined contribution plans will rise to $40,000; the $140,000 annual benefit limit for defined benefit plans will rise to $160,000; the $170,000 limit on compensation that can be taken into account will rise to $200,000. Other changes make it easier for employers to offer more benefits. For example, the deduction limit for contributions to profit sharing or stock bonus plans is increased from 15% to 25%.

Credit for Retirement Savings
Beginning in 2002, but expiring at the end of 2006, there's a new credit for retirement savings of taxpayers with lower incomes. If you can qualify, you can get a credit of up to 50% of the amount you contribute to almost any kind of retirement plan, including a 401k plan, 403b plan, traditional IRA or Roth IRA.
    Before you get too excited, the income limits are set so low that most people who qualify for the 50% credit won't be able to save for retirement. Even if they can do so, they may not have enough income tax liability to claim the credit. At somewhat higher levels of income, though, the credit is available at lower rates and amounts to "matching money" from Uncle Sam for retirement savings. Here are the credit rates:

The credit isn't available for taxpayers under 18, full-time students or dependents.

Also Noteworthy

Beginning in 2002, a credit of up to $500 is available for certain small businesses that incur expenses in setting up a new retirement plan.

A provision permitting nondeductible contributions to 401k plans (similar to Roth IRA contributions) is included in the new law but won't take effect until 2006.

by Kaye Thomas    
June 11, 2001    

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