Retirement Planning: Gearing-Up for 2002 Changes

By Neil A. Ringquist, C.P.A., J.D., Senior Writer Analyst, CCH FEDERAL TAX GUIDE and CCH U.S. MASTER TAX GUIDE, contributing author, CCH FOCUS.

tarting in 2002, the desirability of an individual having well-funded retirement accounts will gain new emphasis and importance when it comes to satisfying the complimentary goals of tax and financial planning. The engine behind this new emphasis is the tax legislation, which was signed into law on June 7, 2001 (i.e., the Economic Growth and Tax Relief Reconciliation Act of 2001), and which permits many individuals to significantly increase the amount of their annual contributions to various types of retirement plans. Of course, while the new law increases the amount that an individual may contribute, it does not provide the monetary means by which an individual will be able to afford to make the contributions. Still, for those individuals with the financial wherewithal, the new provisions are a boon to annual tax reductions and a help to ensure a financially secure retirement.

The following discussion provides an overview of how the contribution limits imposed on various types of retirement plans will be changed starting in 2002. As is well known by now, one of the unique features of the new tax legislation is that it dictates that the majority of the changes will be phased in over the next few years. This phase-in feature is especially dominant in the area of retirement plans, and over the coming years Congress may well choose to accelerate or prolong the dates by which the provisions will be fully in force.

IRAS - TRADITIONAL & ROTH

Nothing in the new law changed any of the existing rules that govern when an individual may claim a deduction for contributions to a traditional IRA or income limits for contributions to a Roth IRA. For example, for 2002, if a married couple are both covered by a qualified plan, their ability to claim the maximum $6,000 deduction for their combined contributions to a traditional IRA will be phased out when their adjusted gross income falls between $54,000 and $64,000. If their adjusted gross income is over $160,000 on a joint return, they will be unable to contribute to a Roth IRA and should consider a nondeductible traditional IRA for their $6,000 contribution.

Catch-up contributions. For tax years 2002 through 2005, an individual who is at least age 50 by the end of the tax year will be able to make an additional $500 contribution to an IRA. After 2005, the maximum catch-up contribution will increase to $1,000. (No provision is made for any inflation increase to this $1,000 maximum.) Thus, for 2002, a married couple who are both at least age 50 and file a joint return would be able to make a total IRA contribution of $7,000 ($6,000 regular contributions and $1,000 in catch-up contributions) to a traditional and/or Roth IRA, assuming that they meet all the other standard requirements (e.g., income limits, etc.).

401(K) PLANS

For 2002, the maximum contribution limit for an employee’s elective deferral into a 401(k), 403(b) or 457 plan will increase to $11,000 (the maximum was $10,500 in 2001). For each subsequent year, the maximum will increase by $1,000 (e.g., $12,000 for 2003 and $13,000 for 2004) until a maximum of $15,000 is reached in 2006. After 2006, the maximum may be increased for inflation.

Catch-up contributions. As with IRAs, individuals who are at least 50 years old may make an additional annual contribution. For 2002, the maximum catch-up contribution is $1,000. This amount is increased by $1,000 each year until it reaches a maximum of $5,000 in 2006. Thereafter, an inflation adjustment may be made.

DEFINED CONTRIBUTION PLANS