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New Year Tax Info

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Contribute More Retirement Monies.

Individual Retirement Account (IRA) Provisions -- Under the new law, beginning in 2002, the IRA contributions limit for traditional and Roth IRAs gradually increases from $2,000 to $5,000 by 2008 with inflation adjustments thereafter. For individuals age 50 and above, the limit increases another $1,000 by 2006.

Expanding Employer Pension Plans -- Beginning in 2002, the Act increases from $10,500 to $11,000 the annual dollar limit on salary deferrals to 401(k) plans and 403(b) plans. The limit increases in $1,000 annual increments until it reaches $15,000 in 2006. Thereafter, it will be indexed to inflation with adjustments in $500 increments.

Salary deferrals to Savings Incentive Match Plans for Employees (SIMPLE plans) increase to $7,000 in 2002, from the current limit of $6,500, with phased increases to $10,000 in 2005. After 2005, the limit adjusts for inflation in $500 increments.

The Act raises from $140,000 to $160,000 the annual dollar benefit limit for a defined benefit plan in 2002. This limit adjusts for inflation in $5,000 increments. The limit on annual addition to defined contribution plans which is currently $35,000, jumps to $40,000 in 2002 and the annual inflation adjustment decreases to $1,000 increments.

The compensation limit for qualified plans increases from $170,000 to $200,000 in 2002. This amount adjusts for inflation in $5,000 increments. Under prior law, the deduction limit for a 401(k)/profit-sharing plan was limited to 15 percent of participant compensation minus salary deferrals. Effective in 2002, however, salary deferrals--which were also considered employer contributions for the deduction limits--no longer apply for this deduction limitation.

Additionally, the deduction limit for profit-sharing or stock bonus plans increases from 15 percent to 25 percent of eligible compensation. In the past, an employer needed to link a profit-sharing plan with a money-purchase pension plan to achieve the maximum contribution rate. Now that the deduction limit for profit-sharing plans has been increased, we are likely to see employers moving away from adopting money-purchase plans.

Generally, employers will find the discretionary contribution formula in a profit-sharing plan more attractive than the required contribution of the money-purchase plan. Under the Act, beginning in 2006 Section 401(k) plans and Section 403(b) plans can include a program that allows participants to elect to have their salary deferrals treated as Roth contributions. Beginning in 2002, a nonrefundable credit for elective deferrals and IRA contributions is available to certain taxpayers who have salary deferred to various retirement plans and IRAs. The maximum annual contribution eligible for credit is $2,000. The credit rate depends on the taxpayer's AGI.

Additionally, the Act grants small businesses (100 or fewer employees) a tax credit for new retirement plan expenses within the first three years of the plan. Credit applies to 50 percent of the first $1,000 in administrative or retirement education expenses for plans established after Dec. 31, 2001.

Retirement planning is now as important as ever and please consult a professional advisor to consider your options.

Peter Soh, CPA and CEO of AdviseInc.com

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See also: Year-End Tax Advice

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