Money Talks: Tax Law Increases Saving Opportunities

Reprinted from PN February 2002
View Forum | Print Article | Font Size + / - | Back
The Economic Growth and Tax Relief Reconciliation Act of 2001 encompasses a wide range of changes benefiting taxpayers of all ages and income brackets—e.g., a new 10% tax bracket, a drop in tax rates over the next five years, and an increased child credit. But some of the greatest opportunities created by the law are in three major areas of personal finance: retirement saving, college funding, and estate planning.

Individual and employer-sponsored retirement-saving plans got a boost with the new law. Beginning in 2002, the contribution limit for Individual Retirement Accounts (IRAs)—traditional and Roth—increases to $3,000 a year annual limit. After that, the limit will move up in phases until it reaches $5,000 a year in 2008. Individuals age 50 and over will be eligible to make additional "catch-up" IRA contributions of up to $500 in 2002 through 2005, increasing to $1,000 for 2006 and later years.

Beginning in 2002, participants in certain defined-contribution retirement plans, such as 401(k) and 403(b), may contribute up to $11,000 of their salary. The contribution limit is scheduled to rise annually in $1,000 increments to $15,000 in 2006.

The annual elective salary-deferral limit for Savings Incentive Match Plan for Employees (SIMPLE) plans, available to companies with 100 or fewer workers, will rise to $7,000. By 2005, this amount is slated to increase to $10,000.

Eligible participants age 50 or over in 401(k) plans may be able to make catch-up contributions of $1,000, an amount that increases in increments of $1,000 annually to $5,000 in 2006. SIMPLE-plan participants in this age group may be able to make catch-up contributions of $500, a limit that increases in increments of $500 a year to $2,500 by 2006.

With the new law, two popular college-saving vehicles—state-sponsored 529 plans and Coverdell Education Savings Accounts (formerly known as Education IRAs)—become even more valuable funding avenues.

The 529 plans allow parents, grandparents, and others to contribute to an account that can be used to pay a child's college tuition and room and board, as well as other expenses. Starting in 2002, gains will be tax-free when withdrawn for qualified expenses. The assets may be used for private colleges and universities as well as public institutions, and graduate and postgraduate schools such as medical schools.

Also starting in 2002, for taxpayers who qualify, the annual nondeductible contribution limit to Coverdell Education Savings Accounts increased to $2,000 a year per designated beneficiary. The assets can grow tax-deferred and be withdrawn tax-free if used for qualified higher-education expenses. The new law allows assets to be used for qualified elementary and secondary education expenses, including tuition for private and parochial schools.

The new law repeals the estate tax in 2010. In the interim, it increases the credit that allows taxpayers to exempt a portion of their assets from estate taxes. Beginning in 2002, the estate-tax exemption will be $1 million and then gradually rise to $3.5 million in 2009. In 2002, the highest estate and gift tax rates will be reduced from 55% to 50% and will then gradually drop to 45% in 2007.

Unless the repeal is extended, in 2011 the estate-tax exemption is scheduled to roll back to $1 million; the top estate and gift tax rate is slated to return to 55%. Because of these changes, thoroughly review your current estate plans.

Meet with your tax and financial advisors to review the new tax law and its implications for your retirement-saving, college-funding, and estate-planning strategies.

Rosemary Berkery is Merrill Lynch and Co., Inc., executive vice president. Visit the company's Families of Children With Disabilities Program Web site,


To read more about this, order the February 2002 PN, Click Here.
To Subscribe, Click Here.

Article Forum

PN Forum discussions are intended to provide a place for free-flowing exchange of information, opinions, and comments and are designed to provide an enjoyable and informative expression for all participants.
Please review our Forum Rules for complete details.

Login with username and password (Forgot Password?)
New Post

Money Talks: Tax Law Increases Saving Opportunities


Be the first to comment on this article.
(Register or login to add comments.)