Understanding the 2001 Tax Act
The Economic Growth and Tax Relief Reconciliation Act of 2001 is a tax law that offers
good news to anyone who's saving for retirement. If you are in the process of planning your
retirement, you should be aware that not all of the benefits go into effect right away.
Also, some benefits will phase in over time. To give you an idea of the recent
changes and how they might benefit you, here's a summary:
Increased IRA contributions
Beginning in 2002, the new law increased the maximum annual IRA contribution to $3,000
(from $2,000) with further increases scheduled in future years. As in the past, the
actual, permitted amount of your contribution depends on your level of income.
| Calendar Year |
Maximum Contribution |
| 2002 |
$3,000 |
| 2003 |
$3,000 |
| 2004 |
$3,000 |
| 2005 |
$4,000 |
| 2006 |
$4,000 |
| 2007 |
$4,000 |
| 2008 |
$5,000 |
Please note: The $5,000 maximum contribution limit will be adjusted for inflation after
year 2008.
IRA "catch up" feature
If you are at least 50 years old, you can add an additional $500 to your Traditional or
Roth IRA contribution (as of 2002). The catch up amount will be increased in future
years. A similar catch up feature will be available to people who participate in
qualified retirement plans, such as a 401(k) plan.
| Calendar Year |
IRA Catch Up Feature |
| 2002 |
$500 |
| 2003 |
$500 |
| 2004 |
$500 |
| 2005 |
$500 |
| 2006 |
$1,000 |
| 2007 |
$1,000 |
| 2008 |
$1,000 |
Retirement plan rollovers
As of 2002, the new tax law made it easier for you to rollover the balance from a
qualified retirement plan to another qualified plan. Before that, you could not make
a tax-free rollover of your IRA balances into a qualified plan such as a 401(k).
However, under the new law, you are allowed to rollover amounts from your IRA into any
eligible retirement plan, whether it is another IRA or a plan sponsored by your employer.
Also,as of 2002, you are able to rollover your "after-tax" contributions to another IRA
or to your employer's defined contribution plan. However; in either case, the law
does not stipulate that any qualified plan is required to accept rollovers.
Coverdell Education Savings Accounts (formerly Education IRAs)
Before the enactment of the new law, educational IRAs had an annual contribution limit
of $500 per child. As of 2002, you can now contribute $2,000 to an account annually
for each child (from birth to age 18). In addition, the
Coverdell Education Savings Accounts can
accept contributions from corporations, tax-exempt organizations and other entities,
however, the total amount contributed for any one child cannot exceed the $2,000 per year
contribution limit. The new law also gives you until April 15 after the close of the
applicable tax year (as opposed to December 31, of the same tax year) to make contributions
to Educational IRAs.
Confused about Individual Retirement Accounts?
Our IRA article explains the differences
between Roth, traditional and educational IRAs. You're also welcome to
send us a note or visit
a branch near you.
*Securities are offered and sold by Northwest Financial Resources, and are not
insured, may lose value, and have no credit union guarantee.