Jim Ries: ‘What ever happened to the article about the new rules on retirement plans, promised in the one about education IRAs and 529 plans? It’s been more than a month.
☞ You’re right! That column was about the improvements in the college savings plans that were put into the tax bill, thanks largely to the efforts of the Chair of the Senate Education Committee, Republican … oops … Independent Jim Jeffords of Vermont.
(A Republican by birth and choice, Jim Jeffords lasted through the Republicanism of Richard Nixon and of Ronald Reagan and even of Newt Gingrich, yet made it through only four months of the Bush/Lott/Armey years.)
Those changes make saving for college far easier. But before you start spending all your money to fund college plans for your kids, make sure you’re taking care of yourself. As nice as it might be to pay for all their college costs, you’re helping your kids more if they don’t have to worry about YOU during your retirement years. Here’s the good news on that front, starting in 2002 (thanks to the estimable Less Antman for helping to pull it together for me – if it leaves you with specific questions, click at upper left to ‘Ask Less‘):
- IRA limits have increased. The IRA contribution limit stayed at $2,000 through decades of inflation, so for starters, the new tax bill hikes it to $3,000 on January 1, 2002, which is ideally the day you should fund your 2002 contribution (although it would not be unreasonable to wait until January 2). For people over 50, for whom retirement looms, it’s $3,500. By 2008, the limit rises to $5,000 ($6,000 for those over 50) and is indexed for inflation from then on . . . until the end of 2010, when the tax bill expires and the limit goes back to $2,000. Presumably, Congress will in fact not roll back the limits, which is why the so-called $1.35 trillion tax cut this decade will be more like a $4 trillion or $5 trillion tax cut next decade. Which is why a lot of this tax cut will wind up being chopped way back. No way will the estate tax ever really fall to zero for families with tens of millions or billions of dollars, nor should it. But the new retirement-fund limits may well hold and, as one who believes in savings, I hope they do.
- Employer-funded plan limits have increased as well. Happily for the average working man, defined benefit plans can now take into account annual wages up to $200,000 (versus a meager $170,000 before). And the annual funding of a defined contribution plan bumps up from $35,000 to a more compassionate $40,000.
- SIMPLE plans allow each employee to contribute up to $6,000 of earnings in 2001. The new law raises that $1,000 each year until it hits $10,000 in 2005. Contribution limits on 401(k), 403(b), 457, and SARSEPs are rising to $11,000 in 2002, then increase $1,000 each year until reaching $15,000 in 2006. All these plans have higher limits for folks over 50, and contribution limits are indexed for inflation once the top number is reached. Until 2011, of course, when it all reverts to today’s levels, which is why it’s really a modest and fiscally sound $1.35 trillion tax cut that was passed.
- Married couples previously earning too much to qualify to contribute to Education IRAs will now be able to do so unfettered unless their adjusted gross income exceeds $190,000 (at which point the contribution limit rapidly phases out for those whose incomes exceed $220,000). Another reason for the average guy-and-gal to cheer. (The $95,000 limit on single people and couples denied the right to marry remains unchanged.)
- Single taxpayers with up to $15,000 of adjusted gross income (and joint filers with up to $30,000) are given a 50% tax credit for contributions of up to $2,000 to retirement plans (including Roth IRAs!). The credit phases out rapidly above $15,000 ($30,000), and there is no credit for singles with income above $25,000 (or joint filers above $50,000). The problem is that people who earn so little may have a rough time putting $2,000 away in the first place. And the tax credit is not “refundable” (meaning that if you owe no tax, you get no credit). And it doesn’t apply to anyone who is a full-time student or is a dependent on someone else’s return. And it expires after 2006, in part, one assumes, to help pay for the estate-tax cuts for the very wealthy. That said, if you have kids or grandkids recently out of school and in the work force (or you are such a kid, with parents or grandparents of your own), you might want to explore this. A parent might give $2,000 to a child fresh out of school and earning $30,000 while his wife stays home with the baby, which the child could then use to fund a Roth IRA and recoup $1,000 on their tax bill. At least up to 2006.
To me, the main deal here is the increased limits on Roth IRA’s. Everyone who can should put away the maximum each year. Roth IRAs will go a long way to providing a reasonable tax-free retirement income to supplement Social Security.
Sorry this column was posted late. Can we all agree to make this a very lazy week and skip a separate Friday column? Slather on your sunscreen (really! It’s important!) and have a great weekend.