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To Your Financial Health
by Thomas R. Lovell, MS, CFP
New Rules Present Expanded Opportunities to Save For Retirement
and College!
The Economic Growth & Reconciliation Act of 2001 created
a series of new incentives to save and invest for retirement
and education. Effective January 1, 2002, individuals had
more choices and better opportunities to benefit from the
tax-advantaged savings of retirement pans. Your challenge
is to determine which type of savings plan will best serve
your needs. Following are some major highlights.
The Traditional IRA: Familiar to most investors, continues
to be available, with some significant changes. First, the
current income limits for taking full or partial deductions
for IRA's by individuals who are "active participants"
in employer-sponsored retirement plans has been raised.
Income limits increased for a fully deductible traditional
IRA: $34,000 for single filers, $54,000 for married Joint
filers. This begins to phase out for single filers with AGI
(adjusted gross income) $34,000 to $44,000 and joint filers
with AGI from $54,000 to $64,000.
Spouses who don't participate in an employer-sponsored retirement
plan may take a full $3,000 deduction for their IRA's, even
if the other spouse is active in an employer- sponsored retirement
plan. The limit for full deductibility is a joint AGI of $150,000,
with a full phase out at $160,000.
Contribution limits have increased to $3,000 in 2002 &
2003. Individuals age 50 or older may also make an additional
$500 catch-up contribution.
Finally, the 10% penalty for most withdrawals prior to age
59(1/2) will not apply if taken for qualified higher education.
Additionally, a maximum of $10,000 may be used to fund a first-time
home purchase.
The Roth IRA: This IRA is distinguished by the fact
contributions are non-deductible. Contribution limits have
increased to $3,000 in 2002 & 2003. Individuals age 50
or older may also make an additional $500 catch-up contribution.
Ability to make contributions will phase out at an AGI of
$95,000 to $110,000 for single taxpayers and $150,000 to $160,000
for married taxpayers filing jointly. Earnings aren't taxed
at withdrawal...as long as two requirements are met.
Distributions are considered tax-free after the account has
been open five years. The holding period begins with the first
year the individual made a Roth IRA contribution.
In addition one of the following criteria must be met: a.)
distributions are used for "first-time home buyer"
expenses up to a maximum of $10,000; or b.) distributions
are made to the estate or beneficiary due to death of the
Roth IRA owner; or c.) distributions are due to disability
of the Roth IRA owner; or d.) distributions are made after
the Roth IRA owner attains age 59(1/2)
The Roth IRA presents an opportunity for individuals over
70 1/2, who are still working, to contribute up to $3,500
per year, subject to phase out rules. This is something you
aren't allowed to do with traditional IRA's.
Rollover Conversion, Traditional IRA to a Roth IRA: Investors
with AGI of not more than $100,000 may convert a Traditional
IRA to a Roth IRA. An investor is subject to income tax, but
not penalty, on the amount converted. You cannot roll a distribution
directly from a company retirement plan to a Roth IRA.
Should you roll assets from a Traditional IRA to a Roth IRA?
There isn't any "right answer" that neatly fits
all situations. The answer depends on whether it's worth paying
income taxes now, in return for tax-free withdrawal of earnings
later. Some points to consider include:
Do you expect to be in a higher or lower tax bracket when
you retire? How many years will you be investing in a traditional
IRA before retirement? Could you afford to pay tax on the
rollover without dipping into the IRA?
Tax Sheltered Annuities 403(b): Employees of most
school districts and other non-profit organizations may now
defer larger amounts into their 403(b) accounts. For 2002
the standard deferral is $11,000. An age 50 or older catch-up
allows and additional $500. As of 2003 these limits increase
to $12,000 with a $1,000 catch-up. Standard deferral limits
are no longer subject to a maximum exclusion allowance calculation.
401(k) & 457 Plans: Offered through for-profit
businesses and State and Local municipalities respectively,
provide an excellent savings tool. Deferral limits for each
plan type is $12,000 with a $500 age 50 or older catch-up
in 2002. For 2003 limits are $13,000 with a $1,000 catch-up.
Frequently these plans offer an employer matching contribution.
Don't pass up this opportunity to boost your retirement savings.
Coverell Education IRA: Offer the important benefit
of tax-free withdrawals for qualified education expenses (e.g.,
tuition, books, and supplies). An Education IRA may be used
to fund primary and secondary education, as well as higher
education starting this year.
One Education IRA may be established per child, under age
18, per year. A maximum of $2,000 can be deposited, after-tax,
by single taxpayers with AGI of $95,000 or married filing
joint with AGI of $190,000 or less. Phase out begins at $95,001
to $110,000 for single persons and $190,000 to $220,000 for
married persons filing jointly.
Earnings accumulate tax-deferred. Assets must be withdrawn
by the beneficiary's 30th birthday. The person who establishes
the account retains control over the account. Withdrawals
not made for qualified expenses may be subject to both income
taxes and a 10% IRS penalty.
An alternative method for college savings is available through
most states called Section 529. Options abound for those willing
to wade through the myriad of rules and investment choices.
This may in fact be the best thing since "sliced bread"
for many parents to explore.
Running out of retirement savings is a gamble you don't want
to take. A study in 2001 by Georgia State University and Aon
Consulting found that retirees spent less than they did before
retirement, but that household expenses remained about the
same. The main savings came because taxes were less and they
were no longer saving for retirement. However, the study also
noted that retirement spending as a portion of pre-retirement
spending necessary to maintain standard of living is on the
rise. It went from 67 percent of pre-retirement income for
a couple earning $60,000 a year in 1997, to 75 percent today.
While the new tax law has created many expanded choices not
all decisions will be clear cut. The appropriate course of
action depends on individual circumstances. To determine your
best option seek the professional advice of an accountant
or Certified Financial Planner.
Securities offered through Cadaret Grant & Co., Inc. Member NASD/SIPC, PPG and CG are separate entities. Securities and/or insurance products not insured by FDIC/NCUA or any government agency. May lose value. Not a deposit of or guaranteed by any bank, credit union or any affiliates. Licensed in AZ, CA, CO, CT, GA, ID, MA, ME, NC, NH, NJ, NY, PA, VA, VT and WY.
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