Pension, IRA Reform Good News For Investors

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CCH Tax Legislation Update


Employees, Employers, Small Businesses All Have Opportunity to Benefit from Changes in Tax Laws…But It Won't Happen Overnight

(RIVERWOODS, ILL., May 26, 2001) – With the Economic Growth and Tax Relief Reconciliation Act of 2001, saving for retirement becomes much more attractive and flexible for millions of working Americans, according to CCH INCORPORATED (CCH), a leading provider of tax and business law information, software and services. Small business owners, low-income earners and those nearing retirement also have further incentive to save through tax credits or increased limits for retirement funding.
“With more than 40 provisions in the Act dedicated to pension and IRA reform, just about everyone is affected by the changes,” said Nicholas Kaster, an attorney and senior IRA/Pension analyst for CCH. “The provisions are really aimed at inducing taxpayers to save more for retirement and at making it easier for employers to offer retirement plans.”

Retirement Contribution Limit Increases

Probably the biggest change for most taxpayers is the increased contribution and benefit limits included in the Act for IRA, 401(k), 403(b), 457 and other employer-sponsored retirement plans.

For IRAs, the Act increases the maximum deductible annual contribution levels from the current $2,000 to $5,000 by 2008. This is the first time that the maximum deduction for IRAs has increased since they were first introduced in 1975, and the Act now calls for the deductions to be adjusted annually for inflation in $500 increments starting after 2008.

Tax year Maximum deduction for IRAs
2002 through 2004 $3,000
2006 and 2007 $4,000
2008 and thereafter $5,000 (inflation adjusted after

For 401(k) and 403(b) plans, the Act increases the maximum contribution levels from the current $10,500 to $15,000 in 2006.

Tax year Maximum Contribution for
401(k) and 403(b) plans
2002 $11,000
2003 $12,000
2004 $13,000
2005 $14,000
2006 or thereafter $15,000

Those saving through SIMPLE plans also get a boost to save more, with maximum deductible contributions rising to $10,000 for 2005.

Near-Retirement Benefits

Those taxpayers age 50 and over also will get further incentive to save toward retirement with “catch-up” contributions. Under the Act's “Enhancing Fairness to Women” provision, people 50 and older will be able to make additional catch-up contributions of up to $5,000 to 401(k), 403(b) and 457 plans by 2006. Participants in SIMPLE plans will be allowed catch-up contributions of up to $2,500 by 2006. Catch-up contributions for IRAs also will allow these taxpayers to contribute up to an additional $1,000 to their accounts.

Tax year Catch-Up Contributions
for 401(k), 403(b)plans
2002 $1,000
2003 $2,000
2004 $3,000
2005 $4,000
2006 and thereafter $5,000

Tax year Catch-Up Contributions
for SIMPLE plans
2002 $500
2003 $1,000
2004 $1,500
2005 $2,000
2006 and thereafter $2,500

Tax year Catch-Up Contributions
for IRAs
2002 through 2005 $500
2006 and thereafter $1,000

“The intent of the catch-up provisions is to allow women who have returned to the workforce after raising children to put more toward their retirement,” said Kaster. “However, both men and women who may have postponed retirement savings for other reasons can take advantage of the provisions, as can those who have fully funded their retirement plans in the past.”

Not Your Father's 401(k)

New under the Act is the introduction of “Roth-style” 401(k) and 403(b) plans that follow similar rules established for Roth IRAs. With this provision, employees will be able to make after-tax contributions to their 401(k) and 403(b) plans. While a boon for those who would prefer to be taxed today for the opportunity of tax-free withdrawals in the future, this new savings vehicle requires that employers segregate in separate accounts traditional pre-tax contributions from the new after-tax contributions.

Accommodating the Mobile Workforce

The Act also provides faster vesting in retirement plans, makes it easier for employees to make rollovers from one type of plan to another and provides some relief from the 60-day limit rule for rolling over from one retirement plan to another.

“These provisions are an acknowledgement of the changing work environment. Employees are moving between jobs more often and the need for flexibility and portability is becoming more important,” said Kaster.

As part of the legislation, the vesting schedules for employer-sponsored plans decreases from five years to three years. Employees changing jobs will be able to make rollovers between different types of employer-sponsored plans or from an IRA to an employer-sponsored plan.
The Internal Revenue Service also is being asked to create a hardship exception to the strictly enforced 60-day limits for rollovers, in cases of “casualty, disaster or other events beyond the control of the individual.”

Tax Credit for Low-Income Earners

To further encourage low-income taxpayers to put aside money for their retirement, the Act establishes a temporary, non-refundable tax credit for contributions to an IRA or employee-sponsored plan tied to the individual's adjusted gross income (AGI) and not to exceed $2,000 in credit. For joint filers earning no more than $30,000, the credit applies to 50 percent of the retirement contribution they make. A joint filer with an AGI of $30,000 to $32,500 can receive a 20-percent credit for retirement investments while a joint filer with an AGI between $32,500 and $50,000 can receive a 10-percent credit. Above $50,000, the credit is not available.

Tax Credits for Small Businesses

A nonrefundable tax credit for small businesses is also included in the Act to encourage small businesses to establish retirement plans so their employees have more options for saving and to help offset some of the administrative costs of establishing these plans.
The Act provides for a credit of up to 50 percent of the startup costs incurred by the small business in setting up a plan. However, the dollar limit for the credit is no more than $500 for the first three years of plan, after which there is no additional credit offered.

Patience Required

Just as patience is a virtue in investing, patience also is needed when it comes to the new pension and IRA incentives.
“While the IRA and pension reform is significant legislation, estimated to allow taxpayers to save tens of billions of dollars over the next 10 years, most of the provisions are phased in gradually. This means that while taxpayers may be anxious to take advantage of them, they're going to have to wait awhile before realizing the full impact,” said Kaster.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at The CCH Federal and State Tax group web site can be accessed at and the Human Resources/Pension Group web site can be accessed at

Editor's Note: Additional press releases and related information on other provisions of the tax bill are available at

For members of the press, complimentary copies of CCH's new tax books including 2001 Tax Legislation: Law, Explanation and Analysis, 2001 Tax Legislation: Highlights, Conference Committee Report, Estate Planning Strategies After Estate Tax Repeal: Insights and Analysis, and Estate Planning Under the New Law: What You Need to Know are available by contacting Leslie Bonacum at 847-267-7153 or at [email protected].

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