Starting January of 2002 you can now contribute significantly
more to your retirement account, than in previous years.
This is true if you contribute to an employer sponsored 401k,
403b plan or a self-funded IRA. Last May, congress passed
a retirement bill, which enables you to contribute more money
to all types of retirement accounts starting this January
2002. The new limits are as follows for tax-deferred retirement
accounts for small business, individual, and employer plans:
For IRA's you can now contribute up to a maximum of $3000,
the old rule was $2000.
The maximum will increase over the next few years. In 2002,
2003, and 2004 the maximum contribution will increase to
$3000. For the tax years 2005, 2006, 2007 the maximum contribution
will increase to $4000. In 2008 the maximum contribution
allowed, will be $5000. After 2008 the $5000 will be adjusted
for inflation.
Are you at least 50 years old? Now the government allows
you to play catch-up. You can add an additional $500 per
year, to your IRA contribution until 2005, and $1000 more
in 2006 and later.
With employer sponsored 401k and 403b plan contributions
have also increased.
The maximum deductible contributions for 401k and 403b plans
is now $11,000 up from 10,500.
In 2006 your maximum 401k and 403b contribution will be $15,000.
If you are over 50 years old you can also play catch-up with
your 401k and 403b plans, in 2002 you can contribute a
maximum of $12,000, and eventually in 2006, a maximum of
$20,000.
The government wants you to save for retirement, and has
provided you with the means to do so. This is why it is important
that you understand your retirement options and act now.
Don't become confused with the maximum numbers either. The
maximums are not the minimums, when it comes to retirement.
You can contribute less if you like. Some mutual fund companies
will allow you to start with a contribution as low as $250,
if you agree to make monthly contributions. Many people are
still not investing in their retirement accounts, because
they thought they had to contribute the maximum. The American
Savings Council plans to educate the public with the new
IRA rules.
The following are the new rules summarized:
You can contribute to an IRA even if you contribute to a
401k or 403b plan.
The IRA contribution is for Traditional and Roth IRAs combined.
You may contribute $3000 a year to a Roth or a Traditional
IRA, or $2000 to one and $1000 to the other, or any combination
that adds up to $3000.
You can make your 2002 IRA contribution up to the deadline
for filing your 2002 tax return, which is April 15th, 2003,
and you can make your 2001 contribution up to April 15th,
2002. A 2001 contribution, even if made now, will be subject
to the $2000 maximum.
When is the best time to make your retirement plan contribution?
The earlier the better, early contributions will give you
the chance to get maximum tax-deferred growth. What would
a 50 year-old-today have after 20 years with the catch-up
contribution?
Say you start this year with $3500(this years maximum IRA
for 50 and over); you contribute $3500 a year afterwards
by contributing $292 per month. Let's assume an interest
rate of 8%, for 20 years. Even after starting at age 50,
even though we haven't considered retirement contribution
increases for future years you will still end up with approximately
$190,000. Use our monthly deposit savings calculator to figure
out other scenarios based on the new retirement tax laws.
Rules are subject to change anytime. find
new rules at www.irs.gov.
Lois Center-Shabazz is the founder of MsFinancialSavvy.com
and author of the 3-time award-winning personal finance book,
Let's Get Financial Savvy! ISBN #0971979502.
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