BACK • 
A Closer Look At the Tax Bill
With all the press over the much anticipated tax bill, many of the finer points are being overlooked. The press has been focusing on the rebate check that should be here by Labor Day, but we are more excited about the details. This bill has many intricacies that will benefit savers and investors and offer some much needed tax relief. Let’s take a closer look at how savers and investors will benefit as they work to achieve their bigger goals; saving for retirement and their children’s education.
For those who have come to the realization that Social Security may not be there for them when they retire, Washington has made some steps to allow you to save even more money for retirement. The bill increases the contribution limits from $2,000 to $5,000 over the course of the next seven years. In 2002-2004, the limit goes to $3,000, in 2005-2007 it raises to $4,000, and in 2008, it’s at $5000. Also, starting in 2009, the contribution limit will be increased annually for inflation, in $500 increments. People over age 50 can contribute additional catch-up amounts of $500 in years 2002-2005, and $1,000 in 2006 and beyond.
Like the IRA laws, contributions limits for the 401(k), 403(b) and 457(c) will increase from $10,500 to $15,000 by 2006. Specifically, it increases to $11,000 in 2002, and $1,000 every year beginning in 2003, until capped at $15,000 in 2006. Starting in 2007, the limit will also be increased $500 per year for inflation. Again, those over 50 will have additional catch-up provisions in the 401(k) and 403(b). In 2002 you can put in an additional $1,000 per year, capping at $5,000 in 2006. Provisions were also included to make it easier to combine your different retirement accounts when you terminate your employment. It also has provisions that may allow our clients who have a 457(c) to take control over that account. These measures will allow greater flexibility when moving money around. Also, it will address a major complaint of investors who have six, seven, or even eight separate accounts, not by their own choosing. Hopefully we will be able to decrease the clutter and start to combine some of these accounts.
In 2006, we get the much-anticipated Roth 401(k). There will be no income limitations on the Roth 401(k), unlike the Roth IRA. How this works is you will be able to invest after tax dollars into your Roth 401(k) account. The money will grow tax-free and does not have to be withdrawn before death. You will also be allowed to contribute to both a traditional 401(k) and Roth 401(k), up to a combined limit of $15,000 annually, $20,000 if you are over the age of 50.
The plan did increase the contribution limit on the Education IRA from $500 to $2000. It also now allows parents to use this money for kindergarten through 12th grade education expenses, including tuition for private and parochial schools. However, the bigger news is that it makes qualified withdrawals from a Section 529 plan federal income tax-FREE! This makes the Section 529 Plan, even more powerful that the Education IRA, for saving for college. More money can be tucked away in the Section 529 plan, with better estate-tax handling.
Finally, the bill gradually lowers the estate tax, and increases the annual exemption. The exemption increases to $1 million in 2002, $1.5 million in 2004, $2 million in 2005 $3.5 million in 2009 and by 2010, there will be no estate taxes. In year 2011, IT GOES BACK TO $675,000. That’s right, if Congress does not "re-approve" this bill by 2011, all of the changes will revert back to 2001. So unless you plan on dying in 2010, please keep in touch with your financial advisor and estate planning attorney.
While neither the Democrats nor Republicans got everything they wanted, this is a step in the right direction. Both the "rich" and the "poor" get something good out of this bill. Hopefully, this will be the start of Washington working together for the good of the people.
(Garrett A. Butenhoff is a financial consultant with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)