Getting Most From Tax Cut Takes Work
USA Today (06/08/01) Vol. 21, No. 5 p.3B; Dugas, Christine; Block, Sandra

President Bush signed new tax legislation into law on June 7, which will bulk up retirement funds through increased contribution limits, but only if people are careful about maximizing their benefits. The contribution amounts for Roth or traditional individual retirement accounts will increase to $5,000 per year by 2008, while employee contributions to 401(k) plans will increase to $15,000 per year by 2006. However, highly paid workers will only be able to make contributions to 401(k)s that are within 2 percent of those contributions made by lower-paid employees. Though the new law allows employers to provide employees with a Roth 401(k) plan, few, if any, will opt for it because of bookkeeping hassles that require the employer to separate pre-tax contributions from after-tax contributions, which are tax-free upon withdrawal. However, employees that are 50 years and older will be able to contribute more to their retirement plans due to the catch-up rule. Individuals seeking the best retirement plan have to remember that there are advantages and disadvantages to the 401(k) and the Roth IRA plans. Roth plans have no minimum distribution rules, money can grow tax free, and they have no restrictions on investment options, but 401(k)s often have matching employer funds, reduce taxable income, and allow individuals to borrow against plan assets.

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