New tax act brings advantages with retirement planning

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Focusing solely on the rate of return with retirement investments may be overlooking another important aspect of those investments rate of savings.|ret||ret||tab|

Over the next several years, thanks in part to the Economic Growth and Tax Relief Reconciliation Act of 2001, individuals may increase the amount they set aside for retirement accounts and through 401(k) plans at work. The 2001 act also provides additional "catch-up" contributions and other modified rules for people aged 50 or older. |ret||ret||tab|

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Higher IRA limits|ret||ret||tab|

Under existing law, individuals may be able to make annual deductible contributions to a traditional individual retirement account up to $2,000 or 100% of their compensation, whichever is less.|ret||ret||tab|

The maximum annual dollar limit for IRA contributions will increase over six years, from $2,000 in 2001 to $5,000 by 2008. Individuals who reach age 50 before the close of the tax year will be able to make additional "catch-up" contributions of $500 (from 2002-2005) or $1,000 (year 2006 and later).|ret||ret||tab|

The higher annual maximum IRA limits apply to Roth and traditional IRAs. After 2008, limits will be adjusted annually for inflation in $500 increments.|ret||ret||tab|

Under existing law, an employer-sponsored retirement plan does not allow employees to make traditional or Roth IRA contributions to the plan. |ret||ret||tab|

This will change for plan years beginning after 2002. Eligible retirement plans, including 401(k)s, may allow employees to make voluntary contributions to a separate account established under the plan if it meets the requirements applicable to IRAs.|ret||ret||tab|

Voluntary employee contributions to these separate accounts will be treated as if made to a traditional or Roth IRA. The deemed IRA contributions won't be subject to the rules applying to the qualified retirement plan but will be subject to the general IRA rules.|ret||ret||tab|

This elective feature for eligible retirement plans will make it more convenient for employees to save for retirement with a traditional or Roth IRA. |ret||ret||tab|

For example, they can direct their employer to automatically deduct amounts from their pay and set them aside in the traditional or Roth IRA set up by their employer plan. |ret||ret||tab|

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401(k) & SIMPLE IRA|ret||ret||tab|

Under existing law, the maximum annual elective deferral to a qualified 401(k) plan is $10,500 for 2001. The maximum annual elective deferral to a savings incentive match plan for employees plan is $6,500 for 2001. These limits are adjusted annually for inflation in $500 increments. |ret||ret||tab|

In 2002, the maximum annual elective deferral under 401(k) plans increases to $11,000, with $1,000 annual increments thereafter until it reaches $15,000 in 2006. Likewise, the maximum SIMPLE plan contribution increases to $7,000 for 2002 and in $1,000 annual increments until it reaches $10,000 in 2005.|ret||ret||tab|

Individuals age 50 or over will be allowed additional catch-up contributions phased-in over several years, similar to those allowed for IRAs. After 2006 (2005 for SIMPLE plans), the maximum contributions will be adjusted annually for inflation in $500 increments. |ret||ret||tab|

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Retirement plan loans|ret||ret||tab|

Under existing law, a qualified retirement plan e.g., 401(k) loan to an owner-employee is treated as a prohibited transaction subject to excise taxes. Owner-employees include sole proprietors, partners who own more than a 10 percent interest in the partnership, more than 5 percent owner-employees or officers of an S corporation.|ret||ret||tab|

After 2001, the rule treating plan loans as prohibited transactions will apply only to IRAs, including simplified employee pensions and SIMPLE plans. Thus, non-IRA qualified retirement plan loans to sole proprietors, partners and S corporation owners that meet statutory rules e.g., that loans must be available to all participants will be exempt from the prohibited transaction rules. |ret||ret||tab|

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Other changes|ret||ret||tab|

In addition to increasing allowable annual contributions, the act reforms other areas of the retirement plan rules, including: |ret||ret||tab|

Maximum annual compensation for determining plan benefits and for nondiscrimination testing is increased from $170,000 (2001) to $200,000 beginning in 2002 (indexed for inflation);|ret||ret||tab|

Profit-sharing plan contribution limits increased from 15 percent in 2001 to 25 percent beginning in 2002; and|ret||ret||tab|

Tax credits for lower-income taxpayers participating in retirement plans and for certain small employers adopting retirement plans.|ret||ret||tab|

Although the act is complicated, using complex phase-ins and phase-outs to squeeze as many benefits as possible within its overall $1.35 trillion price tag, the act makes numerous other changes worth noting, including the possibility of additional savings opportunities available to you.|ret||ret||tab|

(Cary Jones, a partner with BKD's Springfield office, specializes in business and personal tax planning services.)[[In-content Ad]]