For almost 30 years, Individual Retirement Accounts have been one of the
cornerstones of many individuals' retirement planning efforts. The 2001 Tax
Act has made this good financial tool even better.
New Contribution Limits
From the 1980's through 2001, the annual contribution limit for IRAs was
$2000. Beginning with contributions for 2002, the annual contribution
limits were increased. Here are the new limits:
Year(s) |
Annual Contribution
Limit |
2001(old limit) |
$2000 |
2002 to 2004 |
$3000 |
2005 to 2007 |
$4000 |
2008 |
$5000 |
After 2008 |
Indexed to Inflation |
These increased limits will make it easier for everyone to accumulate more
money for retirement. Just consider what this means for someone age 35 today.
Under the old law with $2000 annual contributions (for 30 years) earning 7%,
that 35 year old would have accumulated about $204,000 at age 65. With the
new contribution limits, their contributions would have grown to over
$568,000 at age 65 (assuming just a 3% inflation rate after 2008). Maybe that
person could be able to retire at age 62 instead.
Catch-Up Contributions
The new law also introduces the concept of catch-up contributions for IRAs.
Individuals age 50 and over can make additional contributions to help them
accumulate more in their IRAs. The catch-up contributions are limited as
shown below:
Year |
Catch-up Contribution Limit |
2001 |
No provision |
2002 |
$500 |
2003 |
$500 |
2004 |
$500 |
2005 |
$500 |
After 2005 |
$1000 |
For an individual that turned age 50 in 2002 and that made the full catch-
up contributions until he or she retires at age 65, their IRA balance will be
almost $23,000 higher assuming an earnings rate of 7%.
Summary
Individual Retirement Accounts continue to provide all the tax-deferral
benefits that have made them so popular in the past. Now they are just
better. Make sure to examine how you can use your IRA to provide for a
financially secure retirement.
