Bannon Ohanesian & Lecours, Inc.

Economic Growth & Tax Reconciliation Act of 2001

Starting this year, you can tuck away a lot more money into 401(k)s and other tax-favored retirement plans. You can even play catch-up if you’re 50 or older.

If the holiday season set you back more than you had planned, here’s some good news that might take the edge off as the credit card bills start rolling in.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 ~ the increases, the biggest ever, enable you to take a big step forward in building your nest egg.. While 401(k) limits have risen more or less in tandem with inflation, usually in $500 increments, IRA limits of $2,000 a year were set in 1981 and have never been adjusted.

Under the new law, contribution limits to all kinds of retirement plans -- from 401(k)s to IRAs -- are scheduled to rise in increments over the next four to six years. Once they have been phased in, future increases will be indexed to inflation.

The new rules

Here’s how the retirement-saving environment is changing:

Individual Retirement Accounts and Roth IRAs. Contribution limits for regular IRAs and Roth IRAs are $3,000 this year, up from $2,000.
If you’re skeptical about what difference an extra $1,000 a year in savings can make per person, take a look at the numbers: If you save the maximum $3,000 each year for 30 years and earn an average 8% annual return, you’ll end up with $339,849 Under the old rules, investing $2,000 a year, you would have accumulated $226,556 in that period.
IRA contribution limits will rise by $1,000 again in 2005, and once more in 2008 to $5,000.
401(k) and 403(b) accounts. The maximum you can put in this year into these hugely popular employer-sponsored retirement plans is $11,000, up from $10,500 in 2001. The limits will continue to go up in $1,000 increments each year until maxing out at $15,000 in 2006.
SIMPLE plans. Investors in these retirement plans, offered by employers with fewer than 100 employees, can put in $7,000 this year vs. $6,500 in 2001. If you’re self-employed, you can invest in a SIMPLE plan, or significantly boost your contributions with a SEP (simplified employee pension IRA). This year, you can invest 25% of earnings up to $200,000 in a SEP, with a cap of $40,000. In 2001, the maximum was 15% of earnings up to $170,000.
A bonus if you’re 50 or older. The biggest retirement savings benefits go to people aged 50 and over. Thanks to so-called catch-up provisions in the new tax law, they can contribute more to their retirement plans than most folks. Starting this year, they can invest a maximum of $3,500 in an IRA or a maximum of $12,000 in a 401(k). (In 2003, the maximum 401(k) limit with the bonus goes to $14,000 -- $12,000 plus a $2,000 catch-up contribution.)

To get the most out of the new changes, your top priority should be to invest the maximum in your 401(k) or 403(b) plan, if you are eligible for one. Contributions in 401(k)s are made with pre-tax money, and often employers will match a portion of what you put in. These benefits make a 401(k) too good to pass up.

Starting this year, employers must either grant 100% vesting after no more than three years or adopt this phase-in schedule: 20% after two years, 40% after three years, 60% after four years, 80% after five years and 100% after six years. (the new vesting rules apply only to contributions starting this year).

What if you don’t have a 401(k)?

If you aren’t eligible for a 401(k), your first priority should be to contribute whatever retirement plan your employer makes available to you -- a 403(b), SEP or SIMPLE plan. If you’re self-employed, you can invest in an SEP or SIMPLE. Like the 401(k), these plans allow pre-tax contributions, and your money grows tax deferred.

Individual Retirement Plans

Your best bet is to invest in a Roth IRA, because your investments grow tax-free and you can take the money out tax-free. But there are income restrictions: You can only invest in a Roth if your adjusted gross income is $110,000 or less if you are single, or $160,000 or less if married.

There are two kinds of regular IRAs -- deductible and non-deductible. In both cases, your money grows tax-deferred. The added benefit to the deductible IRA is that your contributions are tax-deductible.

If you aren’t eligible for another retirement savings plan, you can contribute to a deductible IRA regardless of income. But if you can participate in another plan, to qualify for a deductible IRA, your adjusted gross income cannot exceed $44,000 for singles or $64,000 for couples. If your spouse is a participant in another retirement plan, but you aren’t, you’re still eligible for a deductible IRA if your combined income doesn’t exceed $160,000.

A non-deductible IRA has no income restrictions.

Retirement Planning

Investors who understand the value of saving for retirement also understand, too, that preparing financially for retirement can go far beyond funding an IRA or company pension plan.

Even if you're contributing into a pension plan (401-k) or other employer-based account, an individual retirement account should be an integral part of your retirement plan. The reason: your earnings accumulate inside an IRA tax deferred, supercharging the already powerful effect of compound interest. The biggest decision you'll face these days is not whether to open an IRA, but rather what type of IRA to go with -- the more traditional tax deductible IRA or the newer tax-free Roth IRA, which can be a flexible supplement to other retirement plans.

If your retirement income sources seem inadequate, we will recommend an adjustment to your plan. Perhaps you will need to save more or invest your assets more aggressively. We can help you to begin preparing now.

Bannon, Ohanesian & Lecours, Inc., can help you plan sufficiently to avoid a shortfall by looking ahead at various points in your retirement years and answering such questions such as:

Important Retirement Planning Information - The information contained herein is general in nature and should not be considered legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect the information contained herein. You should consult with your attorney or tax advisor regarding your specific legal or tax situation.