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How Tax Law Changes Can Boost Your Efforts in Retirement, Education PlanningPosted 4/4/2002By Mark Delp, AAMS
IRA Limits. Of major importance is the new higher contribution limits for both traditional IRAs and Roth IRAs, and the even higher limit set for older workers. The general contribution limit is $3,000 for 2002, up from $2,000. For workers age 50 or older, the contribution limit is $3,500 this year. The higher limit for older workers was authorized by Congress to help those who haven't saved enough for retirement to make up for lost time and "catch up" on their contributions. Traditional IRA eligibility. The income-eligibility limits for deductible IRAs have been increased by $1,000 for taxpayers who are covered by an employer retirement plan. At least a partial IRA deduction will be available in 2002 to joint filers with adjusted gross income of less than $64,000 and to singles with incomes under $44,000. Self-employed plans. Many self-employed workers will be able to stash thousands more into Keogh and Simplified (SEP) plans beginning this year. The contribution plans increase to $40,000 from $35,000. For defined-benefit plans, the maximum annual pension benefit that a retiree can receive has been increased to $160,000 from $140,000. Education accounts. Many more parents are likely to be attracted to Coverdell Education Savings Accounts (formerly Educational IRAs) this year as a result of the major improvements made to the tax-sheltered accounts. The annual contribution limit has been raised to $2,000, up from $500. What's more, the funds can now be used to pay for more than college expenses. Beginning this year, the accounts can also be used to pay for elementary and secondary school expenses, including the purchase of a computer system, educational software and Internet access for the child. In addition, more married couples will be eligible to contribute to educational savings accounts. The ability to make contributions to the account now phases out for married couples with adjusted gross incomes between $190,000 and $220,000 on a joint return, up from $150,000 and $160,000 in prior years. For single individuals, eligibility phases out between adjusted gross incomes of $95,000 and $110,000 - the same as in the past. Employee plans. The contribution limits for employer-sponsored retirement plans have also gone up. The employee contribution limit for 401(k), 403(b) and 457 plans has increased to $11,000 for 2002. (That is up from the previous limit of $10,500.) Workers age 50 or older will generally be able to contribute $1,000 more than the regular limit this year. Simple plans. The contribution limit for SIMPLE plans, offered by smaller employers, increases to $7,000 ($7,500 for workers age 50 or older), from $6,500 in 2001. Rollovers. Several changes aimed at making pensions more portable when switching jobs are now in effect. Under one change, workers can now roll over both the taxable and nontaxable part of a distribution from most types of employer retirement plans into a traditional IRA. The new law also eased restrictions on rollovers from one type of employer plan to another. Estate tax. The gradual phaseout of the estate tax begins this year, with the estate tax exemption rising to $1 million, from $675,000. In addition, the top estate tax rate drops to 50 percent from 55 percent. At this same time, the annual gift tax exclusion increases to $11,000, from $10,000. The exclusion applies to each person to whom you make a gift. College savings plan. State-sponsored college savings plans (529 plans) and prepaid tuition contracts are now a less taxing way to save for a child's college education. In the past, tax had to be paid on the increased value of the tuition contract or account earnings as the child tapped into the funds for college. Starting this year, distributions will be tax-free so long as the funds are used to pay for eligible college expenses. New college deduction. A new college tax deduction of up to $3,000 makes its debut this year to help people whose incomes are too high to get much, if any, benefit from the Hope or Lifetime college tuition credits. The new deduction, which can be claimed regardless of whether you itemize, will be available to married couples with adjusted gross incomes of up to $130,000 on a joint return and singles with incomes of up to $65,000. Student loan deduction. More college grads with student loans to pay off will be able to qualify for the student loan deduction starting this year. For one thing, the deduction of up to $2,500 is no longer limited to the first five years that interest payments are required on the loan. The income eligibility requirements for the deduction for student loan interest have also been loosened. In the past, at least a partial deduction for student loan interest was available to singles with adjusted gross incomes under $55,000 and couples with incomes under $75,000. Starting this year, the income cutoff is $65,000 for singles and $130,000 for couples.
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Several new tax law changes went into effect Jan. 1, 2002. Most newspapers and magazines focused on the reduction of the estate tax, but there were several other important changes that can affect almost every part of your financial life. I have broken down the segments and highlighted the main changes. I encourage you to review these with your financial advisor and set a course that will enable you to achieve your goals.
