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September 2001

Q. I haven't always made the maximum contribution to my IRA. I'm wondering if the new "catch-up" contributions will help me make up the difference. What are these catch-up contributions, and when do they take effect?

A. The tax relief act of 2001 makes provisions for so-called "catch-up" contributions to IRAs, which will indeed benefit many individuals. In short, "catch-up" contributions potentially allow people aged 50 and older an increased annual contribution limit, in addition to the increases scheduled for IRAs in general. The result is that people closer to retirement age can accumulate IRA savings at a significantly faster rate than others. Assuming a 10% rate of growth, a person making the maximum contributions under this new provision for five years could potentially accumulate twice as much money as he or she could under the old law.

However, the term "catch-up" is a misnomer. The amount of your previous IRA contributions has nothing to do with your qualification for making "catch-up" contributions. Whether or not you made the maximum contribution in the past, eligibility for this new increase is based solely on your age and whether you meet other, standing, income limits on IRA participation. If you meet those requirements, you will be able to make increased contributions beginning in tax year 2002. For 2002 through 2005, the regular contribution limit will be increased by $500; for 2006 and after, it will be increased by $1,000. The following table outlines the new scheduled maximum contributions.

Tax Years Age 50 and Under Age 50 and 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 and after $5,000 $6,000

You should consider this increased contribution limit if you are nearing or beyond age 50. Remember, though, that other limits on IRAs still apply. For example, 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, income limits for participating in a Roth IRA still apply. Single individuals must have an Adjusted Gross Income (AGI) of less than $110,000 per year in order to contribute to a Roth IRA. Married couples filing jointly must have an AGI of less than $160,000. Be sure to consult with your financial advisor to be clear on which options are available to you.

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