Tax Relief.

• Author: Josephs, Stuart R.

IRA and Pension Highlights From the 2001 Tax Act

Following are summaries of the 2001 Economic Growth and Tax Relief Reconciliation Act's IRA and pension provisions. Because of budgetary restrictions, these new rules will no longer be in effect for tax, plan or limitation years beginning after 2010.

Increased Contributions for IRAs

The old $2,000 limit for contributions to traditional and Roth IRAs will be increased as follows:

Year Dollar Limit 2002-04 $3,000 2005-07 $4,000 2008 $5,000 2009 & later $5,000 * ((*)This amount will be adjusted annually for inflation in $500 increments.) These increased limits apply for both deductible and nondeductible contributions to traditional IRAs.

Additional Catch-up Contributions

The otherwise maximum contribution limit for an individual who has attained age 50 before the end of the tax year is increased as follows:

Year Increase 2002-05 $500 2006 & later $1,000 These limits are before application of the phase-out for active participants in employer-sponsored retirement plans with adjusted gross income above specified levels for the tax year.

Qualified Retirement Plans

Defined Contribution Plans

Under the old law, the 2001 addition to a defined contribution plan for each plan participant is the lesser of 25 percent of compensation or $35,000. This is indexed for cost of living adjustments in $5,000 increments.

The new law increases the annual limit to $40,000 and is indexed for cost-of-living adjustments in $1,000 increments. The compensation limit is increased to 100 percent.

These changes generally are effective for years beginning after 2001.

Defined Benefit Plans

Under the old law, the 2001 maximum annual benefit payable at retirement under a defined benefit plan is generally the lesser of 100 percent of average compensation or $140,000 (adjusted for cost of living increases in $5,000 increments).

The new law increases the dollar limit to $160,000, but is reduced for benefit commencement before age 62 and increased for benefit commencement after age 65. These rules apply to years ending after 2001.

Compensation Limitation

Under the old law, a participant's annual compensation that may be taken into account for determining contributions and benefits under a plan, applying the deduction rules, and testing for nondiscrimination is limited to $170,000, for 2001. This limit is indexed for cost of living adjustments in $10,000 increments.

For years beginning after 2001, the new law increases the...