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The Golden Years Get More Golden


With employers retreating from guaranteed pensions and Social Security in flux, Congress decided to use the 2001 tax package to nudge workers to save for their own retirement. The message: You're mostly on your own, so start saving.

The lure for savers is higher contribution ceilings on retirement accounts, along with special catch-up provisions for those 50 and older. The law also cajoles people to put cash into such plans by making it easier to borrow from them or to move assets to a new plan when leaving a job--something Americans are prone to do.

Both Roth IRAs, which are funded with aftertax dollars but allow tax-free withdrawals, and traditional IRAs get higher contribution limits for 2002. You can now stash up to $3,000 ($3,500 for the 50-and-up crowd). By 2008, that ceiling rises to $5,000 ($6,000 for older savers). Meanwhile, the income cap for getting a deduction on contributions to traditional IRAs rises to $100,000 for joint filers in 2007, vs. $64,000 in 2002. No caps exist if you don't have a retirement plan at work, and the caps are higher for spouses who don't have a plan.

You also can save more through company-sponsored plans such as 401(k)s and the 403(b)s at nonprofits and educational institutions. You can contribute a pretax $11,000 this year, up from $10,500 in 2001. (Those 50 and older can kick in $1,000 more.) That rises to $15,000 ($20,000 for the 50-plus group) in 2006. The 457s used for government workers share similar benefits. Meanwhile, contribution limits for Simple IRAs and 401(k)s at small companies rise from $6,500 to $7,000 this year, then to $10,000 in 2006, plus catch-ups.

The tax package didn't forget the self-employed. Those with a SEP (Simplified Employee Pension) or a profit-sharing Keogh plan should be able to contribute up to $40,000 pretax. A glitch in another part of the law limits the deduction to 15% of the first $200,000 in self-employment income, or $30,000, but Congress is expected to correct that. For those with a defined-benefit Keogh, the maximum annual payout rises from $140,000 to $160,000.

A change designed to make saving more palatable lets the self-employed borrow from their Keoghs now. The law also extends borrowing privileges at company-run 401(k)s to those at the top, such as sole proprietors.

Another shift makes retirement savings more portable, letting workers roll money between 401(k)s, 403(b)s, and governmental 457s. That's especially good news for those with a 457. Before, they couldn't even transfer savings into an IRA when they left a job. (It's still up to the employer to accept funds rolled from another company plan.)

You can now also roll regular deductible IRA savings into a 401(k). You forfeit some control, but consolidate your assets. Beginning in 2003, employers can help workers set up IRAs at the workplace. Better yet, in 2006 employers may be able to offer Roth-style 401(k)s or 403(b)s. Employees can then split contributions between a regular 401(k) and one similar to a Roth.

"All of these provisions combine to encourage and motivate people" to save for retirement, says Ed Slott, publisher of Ed Slott's IRA Advisor newsletter. If your company no longer wants to take responsibility for your golden years, Congress at least has made it easier for you to add to their luster. By Carol Marie Cropper


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