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Q. What are the new contribution limits for IRAs, 401(k)s, and other retirement plans?

A. The Economic Growth and Tax Relief Reconciliation Act of 2001 enacted a number of changes to the rules regarding IRAs, 401(k)s, 403(b)s, and other retirement plans. One of the areas affected are contribution limits. However, it is important to remember that a number of the changes are being phased in between 2002 and 2010. Also, the Act does not apply to tax years after 2010. It will be up to Congress to renew or change the law; they may even do so well before 2010.

Traditional and Roth IRAs
Contribution limits for Traditional and Roth IRAs will rise from $2000 to $5,000 between 2002 and 2008. After 2008, the limit may be adjusted annually for inflation.

Tax Year Limit
2002-2004 $3,000
2005-2006 $4,000
2008 $5,000
2009-2010 Indexed to Inflation

401(k), 403(b), and 457 Plans
These limits are on pretax contributions to certain employer- sponsored retirement plans. Remember that employers have the option of imposing lower limits than the government maximums, which will rise to $15,000 by 2006.

Tax Year Limit
2002 $11,000
2003 $12,000
2004 $13,000
2005 $14,000
2006 $15,000
2007-2010 Indexed to Inflation

Catch-Up Contributions
"Catch-up" contributions are for people aged 50 and over, in order to balance out the advantages of increased contributions for younger individuals. To be eligible for a catch-up contribution, an individual must first make the maximum regular contribution to his or her IRA or employer-sponsored plan.

Tax Year Catch-Up Contribution
2002-2005 $500
2006-2010 $1000

Catch-up contributions to Traditional IRAs may be tax deductible if the taxpayer meets certain income restrictions.

A SIMPLE plan is a retirement planning vehicle for small business owners and employees. There is a catch-up contribution available for SIMPLE plans that will be gradually increased to $2,500 by 2006, and then indexed to inflation for 2007 through 2010.

Tax Year Limit
2002 $7,000
2003 $8,000
2004 $9,000
2005 $10,000
2006 Indexed to inflation

There are many other changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001, the nuances of which may affect your eligibility for various tax benefits. For instance, the tax-deductible portion of the contribution limits may be reduced depending upon your income. The advice of a qualified professional should always be sought before implementing any tax or financial planning strategy.

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