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Although the news media has been full of information
about tax rate cuts, and estate and gift tax changes,
very little has been said about the many retirement
changes that will become effective over the next few
years. This update will focus on the changes that take
effect on January 1, 2002.
| Increase in
Pre-tax Contribution Limit |
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There is a limit on the amount
of pre-tax contributions that you can make to
your 401(k) plan each year. The current limit
of $10,500 will increase to $11,000 in 2002, and
then increase by $1,000 a year until it reaches
$15,000 in 2006.
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New "Catch-Up" Contributions
for older workers
A new concept called "catch-up" contributions
will allow employees who are 50 or older to make additional
pre-tax contributions. The maximum catch-up contribution
will be $1,000 in 2002. The amount of the catch-up contribution
will increase by $1,000 each year until 2006.
| |
Pre-tax Contribution
Limit
|
Catch-Up Contribution
Limit
|
Maximum Pre-tax
Contribution
|
| 2001 |
$10,500
|
N/A
|
$10,500
|
| 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
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| 2006 |
$15,000
|
$5,000
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$20,000
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Faster Vesting for Matching
Contributions
The matching contributions that your company makes to
your 401(k) account will be subject to faster vesting
rules. Your matching contributions must either be 100%
vested after you have worked for 3 years, or alternatively,
must be vested at a rate of 20% per year starting in
your 2nd year of employment until you are fully vested
after 6 years of employment. Your employer may use a
more rapid vesting schedule for matching contributions,
but cannot use a slower one than the law requires.
Rollover Distribution Rules
Expanded
Rollovers may be made between
401(k) plans, .403(b) and Section 457 plans. In addition,
for the first time, after-tax contributions may be .rolled
into your
401(k) plan.
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Example: Under
current law, if you had previously participated
in a 403(b) plan with a former employer, you could
not rollover your account to a 401(k) plan. Beginning
next year, you will be able to rollover your 403(b)
plan to your 401(k) plan.
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Lower-income earners will receive tax credits on their
plan contributions in addition to the regular pre-tax
deduction.
A nonrefundable tax credit of up to 50% of your pre-tax
contributions to your company retirement plan or IRA
is available as an incentive to save for your retirement.
The maximum annual contribution eligible for the credit
is $2,000. The credit is available for those with an
adjusted gross income of up to $25,000 for single tax
filers or $50,000 for joint tax filers. This credit
will only be available through 2006.
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Tax Advantages of Saving
|
| 2002 Salary |
$15,000
|
$15,000
|
| 401(k) Contribution |
$2,000
|
0
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| Taxable Income |
$13,000
|
$15,000
|
| Tax Rate (10%) |
$1,300
|
$1,500
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| Tax credit |
$1,000
|
0
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| Amount of Tax Due |
$300
|
$1,500
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| Tax Savings |
$1,200
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The maximum amount that may be contributed to your
account annually will also benefit lower-income earners.
That amount increases from 25% to 100% of compensation.
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Example: Your
annual compensation is $10,000. In 2001, the maximum
amount that can be contributed to your retirement
plan account is 25% of your compensation or $2,500.
In 2002, the maximum that can be contributed is
$10,000 or 100% of your compensation.
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Highly paid employees benefit
too!
There is a limit on how much of your compensation can
be considered when figuring the amount of your contributions
under your employer's retirement plan. This year the
limit is $170,000, but next year it will be $200,000.
Additionally, regardless of the amount of your compensation,
the maximum dollar amount that may be contributed to
your account will increase from $35,000 to $40,000 in
2002.
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Example: Your
employer contributes 20% of your compensation
to its retirement plan each year. Your annual
compensation is $200,000. In 2001, the company
makes a $34,000 contribution (20% of $170,000)
to your retirement plan account. In 2002, the
company will make a $40,000 contribution (20%
of $200,000) to your retirement plan account.
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We encourage you to start planning now to take advantage
of these changes. You will be receiving more information
later this year on the specific changes that will be
made to your employer's plan.
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