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FREQUENTLY
ASKED QUESTIONS
Below are Frequently
Asked Questions about many of the retirement-related provisions
of The Economic Growth and Tax Relief Reconciliation Act
of 2001 (the "Act"). The questions and answers are
based on interpretations of certain provisions. You should
consult appropriate counsel for additional information about
the Act. Unless otherwise indicated, these provisions
are effective for years beginning after December 31, 2001.
Q. Did retirement
legislation pass?
A. On Thursday,
June 7, 2001, President Bush signed The Economic Growth and
Tax Relief Reconciliation Act of 2001 into law. Provisions
for enhancements to retirement savings were included as part
of the $1.35 trillion tax-cut package.
Q. What
is the new retirement legislation?
A. Overwhelming
bipartisan support resulted in widespread changes for both individuals
and small-business owners. The Economic Growth and
Tax Relief Reconciliation Act of 2001 provides for improvements
and increased retirement savings for all individuals.
Highlights include:
-
An increase
in the annual amount that can be contributed to IRA's and
other types of retirement plans.
-
A catch-up
savings provision for individuals age 50 or older.
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Enhanced
portability of retirement assets.
-
Ease of testing
rules for qualified plans and 403(b) plans.
Note: The amount
of this additional contribution varies by plan type.
Q. When
will the legislation changes become effective?
A. Many
of the retirement changes are effective January 1, 2002.
Some of the retirement provisions will be phased in gradually
from 2002-2008. Other non-retirement changes will begin
at different times; for example, the new income tax rates will
begin to be phased in on July 1, 2001.
Q. How
much can be contributed to an IRA?
A.
The contribution limit for Traditional and Roth IRAs will
be gradually increased to $5,000 by 2008 and then may be adjusted
for inflation annually. Beginning with contributions for tax
year 2002, the IRA contribution limit increases to $3,000 or
100% of compensation, whichever is less. The catch-up savings
provision allows individuals age 50 or older to make a larger
annual IRA contribution. For tax years 2002-2005, an additional
$500 can be contributed to IRAs; beginning in tax year 2006,
an additional $1,000 can be contributed.
|
TAX YEAR |
STANDARD
IRA CONTRIBUTION LIMIT |
"CATCH-UP"
CONTRIBUTION LIMIT |
MAXIMUM
CONTRIBUTION FOR TAX PAYERS AGES 50+ (BY 12/31/ OF TAX YEAR) |
| 2001 |
$2,000 |
$0 |
$2,000 |
| 2002 |
$3,000 |
$500 |
$3,500 |
| 2003 |
$3,000 |
$500 |
$3,500 |
| 2004 |
$3,000 |
$500 |
$3,500 |
| 2005 |
$4,000 |
$500 |
$4,500 |
| 2006 |
$4,000 |
$1,000 |
$5,000 |
| 2007 |
$4,000 |
$1,000 |
$5,000 |
| 2008 |
$5,000 |
$1,000 |
$6,000 |
| 2009 |
$5,000* |
$1,000 |
$6,000 |
| 2010 |
$5,000* |
$1,000 |
$6,000 |
*As indexed for inflation.
Q. How
much can be contributed to an employer-sponsored retirement
plan?
A.
The maximum annual elective deferral limit will be gradually
increased to $15,000 by 2006 for participants in 401(k), 403(b),
and 457 plans. In addition, the catch-up savings provision allows
individuals age 50 or older who participate in a 401(k), 403(b),
and 457 plan to make larger annual salary deferral contributions.
Beginning in tax year 2002, an additional $1,000 can be contributed.
This catch-up contribution limit increases each year, until
it reaches $5000 in tax year 2006 (and may be indexed thereafter
for inflation).
|
TAX YEAR |
STANDARD
PLAN CONTRIBUTION |
"CATCH-UP"
CONTRIBUTION LIMIT |
MAXIMUM
CONTRIBUTION FOR TAX PAYERS AGES 50+ (BY 12/31 OF TAX YEAR) |
| 2001 |
$10,500 |
$0 |
$10,000 |
| 2002 |
$11,000 |
$1,000 |
$12,000 |
| 2003 |
$12,000 |
$2,000 |
$14,000 |
| 2004 |
$13,000 |
$3,000 |
$16,000 |
| 2005 |
$14,000 |
$4,000 |
$18,000 |
| 2006 |
$15,000 |
$5,000 |
$20,000 |
| 2007 |
$15,500 |
$5,000 |
$20,500 |
| 2008 |
$15,500 |
$5,000 |
$20,500 |
| 2009 |
$16,500 |
$5,500 |
$22,000 |
Q. What
does portability mean and what has changed?
A.
The term portability is used here to refer to the ability
to move your retirement assets between certain types of retirement
plans, and between certain types of retirement plans and IRAs.
The bill includes several changes that may give you more flexibility
and control over your retirement assets. Beginning in 2002,
it will be permissible to move eligible distributions between
many types of employer-sponsored retirement plans (such as 401(k),
403(b), and 457 plans) and IRAs. Additionally, 457 plan investors
will be able to roll over their assets to an IRA (either direct
rollover or 60-day rollover).
Q. How
are employer-sponsored retirement plans for small businesses
affected?
A. There
are a number of new provisions for small businesses. We will
mention a few here. First, the maximum compensation amount on
which annual contributions can be based increases from $170,000
to $200,000. The general annual contribution limit for defined
contribution plans increases from $35,000 to $40,000. Small
business employers may be eligible for tax credits for costs
related to the establishment and maintenance of a retirement
plan. Beginning in 2002 the new annual contribution limit for
SEP-IRAs is $40,000 and the deductible contribution limit for
Profit Sharing plans increases from 15% to 25% of compensation.
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