Hidden treasure

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Recent changes to federal tax law may put a few hundred dollars in the pockets of most Americans this month, but if you delve deeper into The Economic Growth and Tax Relief Reconciliation Act of 2001, you may find hidden treasure.

Signed into law in late spring, the act dramatically changed many of the rules governing IRAs and employer-sponsored retirement plans. Long-awaited changes to laws governing retirement contribution limits will allow people to save significantly more than they had before in tax-deferred vehicles. At the same time, the flexibility of rules governing rollover portability between retirement plans has been expanded.

The first changes are effective Jan. 1, 2002; the rest will be phased in. Here are some of the highlights.

IRA enhancements

Contribution limits will increase significantly. IRA limits rise from $2,000 to $3,000 in 2002, $4,000 in 2005 and $5,000 in 2008. Beginning in 2009, limits will be indexed with inflation. Additionally, IRA owners age 50 or older will be permitted to make catch-up contributions in excess of IRA limits of up to $500 in 2002 to 2005 $1,000 from 2006 on. While men and women can take advantage of catch-up contributions, they have been promoted as a good way for women who left the work force to raise children to keep pace with retirement savings.

Education savings incentives

When Education IRAs were introduced in 1997, the contribution limit per beneficiary was $500. That limit will be increased to $2,000 starting in 2002. The eligibility requirement for married contributors has increased to twice that of single taxpayers, phased out between $190,000 and $220,000 of modified adjusted gross income for those filing a joint return. Savings in an Education IRA may be used for primary and secondary school expenses, in addition to post-secondary expenses.

Another college savings program, the state-sponsored 529 plan, has been expanded. Distributions will no longer be subjected to federal income tax if used for qualified higher education expenses. Since contribution limits are high and there is no income limit on who is eligible to contribute, this will be the premier college funding vehicle for many taxpayers.

In addition, one may contribute to both an Education IRA and a 529 plan for the same beneficiary in the same year. Previously, contributions could be made only to one plan or the other.

Employer-sponsored retirement plan expansion

Changes have been made to employer-sponsored retirement plans, such as the 401(k), to increase retirement savings among employers and their employees. As with an IRA, plan limits will increase over a period of time — 401(k), 403(b), 457 and SAR-SEP salary deferral contributions will increase from $10,500 to $11,000 in 2002, and by another $1,000 every year until 2006, when the limit reaches $15,000 (indexed with inflation starting in 2007).

The profit sharing annual contribution limit will go from 15 percent to 25 percent. Participants age 50 or older may make catch-up contributions in excess of these limits starting at $1,000 in year 2002 and increasing $1,000 per year to a limit of $5,000 in 2006. The new legislation will also relieve some of the regulatory burdens that are a part of retirement plan administration, making them more attractive to small employers.

Increased flexibility

Historically, options for rolling over assets which have accumulated in employer-sponsored plans have been limited. The new law allows for full portability among 401(k), 403(b), 457, money purchase and profit sharing plans when employees separate from service. Under the old rules, after-tax assets in qualified retirement plans and 457 plans were not eligible for IRA rollovers. The new law provides almost unlimited asset portability between IRAs and employer-sponsored plans.

Changes go into effect at the beginning of 2002. If circumstances outside the control of the participant prevent a timely rollover, the 60-day period to complete the rollover may be extended. As a result of these changes, workers are more likely to save within these plans, knowing they can be moved from employer to employer.

While the Economic Growth and Tax Relief Reconciliation Act of 2001 adds changes to the tax law, it will provide taxpayers with dramatically enhanced retirement savings opportunities. Brent Bruckner is an investment executive with Advest Inc. in Canton. He can be reached at (330) 499-1611.