Sinkorswim

01/28/02 - Get Ready To Play Catch Up

By: Frank Armstrong, CFP, AIF

Great News! Along with increased limits for almost all qualified pension plans, a new provision in the Economic Growth and Tax Relief Act (EGTRRA) allows employees over 50 to make additional tax deferred contributions. These are widely referred to as "catch up" contributions designed to encourage older employees to save more heavily for their retirement.

Like many other provisions of the tax act, the benefits are phased in over a number of years and back-end loaded. Beginning in 2002, we will begin to see regular substantial benefit increases under the legislation. For instance, for 401(k) plans the additional contribution will be $1,000 in 2002, then increased each year by $1,000 until $5,000 in 2006, and then indexed in $500 increments. So, an employee turning 50 in 2006 could sock away an additional $75,000 plus earnings on the contributions between 50 and 65.

All existing plans will have to be modified to take advantage of the catch up provisions. If your employer hasn't already done so, a gentle reminder might be in order.

For more about catch up provisions see: The Basics On The New Catch-Up Contributions Allowed In 401k Plans.

Even if you haven't reached 50, you can take advantage of 2002 new higher limits for almost all plans. For both Traditional IRA's and Roth IRA's the contribution limit is raised to $3000 per year, with an additional $500 catch up.

Here are the 2002 limits for 401(k) plans and other pension plans.

For more on 2002 pension limits see: IRS Publication Pension Plan Limitations for Tax Year 2002 It's hard to imagine a case where an eligible employee wouldn't want to boost their retirement income. I have never encountered a client that thought he had too much accumulated in their plan (at least not since the excise penalty tax on " excess" plan accumulations and distributions was removed by the Taxpayer Relief Act of 1997).

These higher limits provide a strong incentive for Americans to invest for their future. These carrots are sorely needed and long overdue given the economic outlook for Social Security and the bulge in Baby Boomer retirements on the immediate horizon.  As a general rule, to which I can think of very few exceptions, stuff every cent you can in your qualified plans. You will thank yourself later.

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