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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.
||Age 50 and Under
||Age 50 and Over
|2008 and after
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.