Dramatic New Retirement Savings Opportunities
Recent legislation increases IRA and employer plan contribution limits, and enhances portability
As an IRA contributor
Annual contribution limits
The $2,000 annual contribution limit for IRAs had not changed since 1981 and had never been indexed for inflation. If the IRA limit had been adjusted for inflation over the years, it would currently stand at approximately $5,000.1 Going forward, contribution limits for both Traditional and Roth IRAs have increased from $2,000 to $5,000 on a phased-in basis as follows:
Year Contribution Limit
2002-2004 $3,000
2005-2007 $4,000
2008 $5,000
After 2008, the limit would be adjusted for inflation in $500 increments.
Catch-up IRA contributions
In the past, anyone who skipped an IRA contribution in a given year – or made a partial contribution – had no way to make up for the missed contribution. Starting in 2002, workers age 50 and older (as of the end of the year) may be able to make increased contributions on a phased-in basis as follows:
Year Contribution Limit
2002-2005 $500
2006 and thereafter $1,000
For participants in an employer-sponsored retirement plan or small business owners
The new legislation makes retirement security available to millions of workers by increasing small business retirement plan contribution limits and allowing workers to save more each year for retirement. The retirement savings package contains a substantial number of provisions, of which only a sample are mentioned below.
The new legislation substantially increases the contribution and deduction limits for many types of employer-sponsored retirement plans. In addition, the annual additions limit on contributions to defined contributions plans (25% of a given worker's compensation) is repealed, allowing workers to contribute up to 100% of their compensation to defined contribution plans, subject to a new increased $40,000 maximum and other applicable limits discussed below.
What's new with SEP-IRAs?
On March 9, 2002, President Bush signed the Job Creation and Worker Assistance Act of 2002. This legislation contains many technical corrections to the Economic Growth and Tax Relief Reconciliation Act of 2001. Specifically, it raised the contribution limits for SEP-IRAs retroactive to January 1,2002.
Contributions to SEP-IRAs can now be up to 25% of employee's compensation not to exceed $40,000 (based upon maximum compensation cap of $200,000) for tax years beginning in 2002. This gives SEP-IRAs the same contribution and deduction limits that are currently available under a profit sharing plan.
Higher elective deferral limits (employee salary reductions from paycheck)
401(k), 403(b), 457, and SARSEP plans
Subject to certain limits on the sum of employer and employee contributions, the limit on employee salary-reduction contributions will increase to $15,000 on a phased-in basis as follows:
Year Contribution Limit
2002 $11,000
2003 $12,000
2004 $13,000
2005 $14,000
2006 $15,000
After 2006, adjustments for inflation will increase in $500 increments thereafter.
The maximum annual deferral limit will increase to $10,000 on a phased-in basis as follows.
Year Contribution Limit
2002 $7,000
2003 $8,000
2004 $9,000
2005 $10,000
After 2005, the limit would be adjusted for inflation in $500 increments.
Salary reduction catch-up contributions
Beginning in 2002, workers age 50 and older (as of the end of the taxable year) may be able to make an additional contribution via salary reduction (elective deferral) to a 401(k), 403(b), 457, SARSEP, or SIMPLE-IRA plan. (The catch-up contributions would not be subject to nondiscrimination rules, except that plans would have to allow all eligible individuals to participate in the catch-up in the same manner.)
Under the proposal, the additional amount of elective contributions that could be made by an eligible individual participating in such a plan would be the lesser of (1) the applicable dollar amount as described below, or (2) the participant's compensation for the year reduced by any other elective deferrals of the participant for the year.
Year Contribution Limit Contribution Limit
  401(k), 403(b), 457, SARSEP SIMPLE
2002 $1,000 $500
2003 $2,000 $1,000
2004 $3,000 $1,500
2005 $4,000 $2,000
2006 $5,000 $2,500
In 2007, the limit would be indexed for inflation (in $500 increments).
Catch-up contributions made under the proposal would not be subject to other contribution limits and would not be taken into account in applying other contribution limits.
Rollovers between various types of plans
The new legislation makes it even easier to manage one's retirement savings by allowing for the consolidation of various retirement account balances. Beginning in 2002, 401(k) (and other qualified plans), 403(b), and 457 plan balances can be rolled into each other, so long as the plan permits such rollovers and is able to separately account for the plan assets, or they can be rolled into an IRA. Also beginning in 2002, after-tax employee contributions can be included in an eligible rollover distribution to a qualified plan or IRA, although separate tax reporting will be required. This means that job-changers may no longer need to leave dormant accounts with their previous employers. In addition, pre-tax IRA balances will be able to be rolled into a qualified, 403(b), or 457 plan if the applicable plan will allow.
Higher compensation limits
The maximum compensation amount on which a contribution can be based increased from $170,000 to $200,000 beginning in 2002. Thereafter, this amount will be indexed for inflation in $5,000 increments.
Defined contribution plan limits
The $35,000 annual contribution limit has increased to $40,000 beginning in 2002, and then adjusted for inflation in $1,000 increments.
Please note, this new legislation contains a "sunset" provision, which means that in the event that no further legislation extends or otherwise amends these provisions, the affected provisions will revert to today's current law in 2010.
What do I do next?
Visit Fidelity.com – for updated information as it becomes available
As with any tax change, consult a tax advisor
Learn more about retirement plans
Simplify your retirement planning by consolidating your retirement assets at Fidelity
1 "Support Swells in Washington for Liberalizing Retirement-Savings Rules," The Wall Street Journal article, 3/3/99.

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