Retirement accounts can receive higher contribution limits

Posted: Wednesday, January 16, 2002

WASHINGTON (AP) -- Some changes are in store in 2002 for people saving for retirement, including higher contribution limits for some plans and better tax benefits.

The changes were in the fine print of the 10-year, $1.35 trillion tax cut passed by Congress and signed by President Bush in 2001. They could be particularly important for Americans age 50 and older who haven't saved enough for their golden years, said Bob Corcoran of Fidelity Investments.

''The new tax law offers significant opportunities for this group to accelerate their savings in their pre-retirement years,'' Corcoran said.

In fact, he added, a 50-year-old who takes full advantage of new savings contribution limits until age 65 could have an additional $800,000 for retirement.

Annual tax-favored contribution limits for traditional or Roth individual retirement accounts will rise from $2,000 to $3,000 in 2002 and for 401(k)-type plans from $10,500 to $11,000. A special ''catch-up'' provision allows people age 50 and over to contribute an additional $500 to an IRA and an extra $1,000 to a 401(k).

Retirement plan contribution limits will increase gradually until they reach $5,000 a year for an IRA in 2008 and $15,000 a year for a 401(k) in 2006. For those age 50 and over, the limits will be $1,000 higher for IRAs and $5,000 higher for 401(k)s.

In addition, beginning in 2002 employees will have greater freedom to make tax-free rollover distributions one type of retirement plan to another. Previously, many rollovers were restricted to the same type of plan.

This is particularly important for people who change jobs and want to move benefits from one employer to another. People are not required to do rollovers, however.

Also new for 2002: a Saver's Credit for individuals with incomes up to $25,000, heads of households earning up to $37,500 and married couples with incomes up to $50,000.

The credit of between 10 percent and 50 percent, depending on level of income, will apply to the first $2,000 a qualified taxpayer puts into an IRA, 401(k) or other retirement account. The credit could be claimed on a taxpayer's 2002 income tax returns, which will be filed by April 2003.

To qualify, a taxpayer must be within the income limits, be at least 18 and not be a full-time student or claimed as a dependent on another taxpayer's return. The credit is scheduled to end in 2006 unless extended by Congress.

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