IRA
The Ins and Outs of IRAs and Retirement Plans
By Michael Bird
Registered Representative, Jefferson Pilot Securities Corporation
The Economic Growth and Tax Relief Reconciliation Act of 2001 promised to deliver important benefits to nearly every American. The Act included tax-rate reductions, child credit increases, marriage penalty relief, education funding incentives, retirement plan enhancements, and much, much more. Since provisions of this act are good until December 31, 2010 with Congress having the option to extend it, it is important to understand some of the enhancements affecting Individual Retirement Accounts (IRAs) and company sponsored retirement plans.
IRAs
Contribution Increases
The annual limit for qualified contributions to both Traditional and Roth IRAs is $3,000 in 2004, $4,000 in 2005-2007, and $5,000 in 2008. After 2008, the limit will be adjusted annually for inflation in $500 increments.
Catch-up Contributions
Individuals who have reached age 50 and who meet the tax law’s adjusted gross income limits for regular contributors for the year, may make additional contributions to both Traditional and Roth IRAs in the amount of $500 for 2004 & 2005 and $1,000 for 2006 and after.
Education IRAs
The annual contribution limit for Education IRAs is $2,000 per beneficiary. The definition of qualified education expenses has been expanded to include elementary or secondary education. In addition, the income limits where contributions are phased out have been increased. Finally, the contribution deadline has been extended to April 15th of the year following the year in which the contribution applies.
Company Sponsored Retirement Plans
Employee Contributions
The annual limit for employee contributions in 401(k), 403(b), and 457 governmental plans will increase to $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006. For SIMPLE plans, the 2004 annual employee contributions will increase to $9,000 and continue to increase by $1,000 to $10,000 in 2005. After 2005, the limit will be indexed for inflation in $500 increments.
Catch-up Contributions
Participants who are 50 years and older will be able to make additional contributions to their 401(k), 403(b), SIMPLE and 457 governmental plans.
Portability of Benefits
Starting with distributions made after 2001, the new law expands rollover options. For IRAs and company sponsored retirement plans, the intent is to provide further incentives for individuals to keep distributed retirement benefits in tax favored accounts and provide more flexibility as to where money can be rolled over.
Rollover Distributions
Under the new law, eligible rollover distributions from company sponsored retirement plans, 403(b) annuities and 457 governmental plans generally may be rolled over to any of the other types of plans (and IRAs) that accept such rollovers. But not all of these plans are not required to accept rollovers.
These are just a few of the benefits provided by the new Economic Growth and Tax Relief Reconciliation Act of 2001. If you have any questions about the provisions of the Act, you should contact your financial advisor.
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