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July 2001

Q. I've heard that IRA contribution limits are changing under the new tax law. What are the new limits and when will they take effect? Will they apply to everyone?

A. Until the recent Tax Relief Act was passed, the annual contribution limit for IRA's had remained at $2,000 since 1981. Now, beginning in 2002, the contribution limit will increase over the next seven years, until it reaches $5,000 in 2008. Adjustments for inflation will be made thereafter. Individuals who are age 50 or older will also have the option of making additional "catch-up" contributions. The term "catch-up," however, is a bit misleading - eligibility for the increased limit is based solely on the person's age, not the amount of his or her past IRA contributions. For 2001, the annual limit remains at $2,000. Scheduled increases are as follows:

Tax Years Under age 50 Age 50 or over
2002 $3,000 $3,500
2003 $3,000 $3,500
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008+ $5,000 $6,000

These changes can certainly have an important impact on your savings plans. Remember, though, that the new tax law has not changed other limits on IRAs. For example, income limits have not changed. You must have earned income in order to contribute to an IRA. If your earned income is less than the contribution limit, you can only contribute up to the level of your earned income.

Also, depending on your tax filing status and Adjusted Gross Income (AGI), the amount you are able to contribute and deduct is reduced, or eliminated. Currently, for single taxpayers, the eligibility for the full amount shown above diminishes starting at $95,000 AGI, and is completely eliminated at $110,000 AGI. Married people who file jointly can contribute the full amount shown if they have an AGI of less that $150,000, but their eligibility to contribute is reduced, then eliminated at $160,000 AGI.

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