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If You're Over Age 50... How to Profit From the New Tax Law in 2002 and Beyond

"The Economic Growth and Tax Relief Reconciliation Act of 2001" did more than cut a few taxes and give you a check for several hundred bucks. Especially if you're over age 50, it created a window of opportunity to help you boost your retirement savings and improve your qualified plan distribution options.

The new law provides more generous contribution limits across the board, "catch-up" provisions for those age 50 or older, plus more flexibility and control in distribution options for those age 70 1/2, says Anne Shropshire, CLU, Associate Publisher with Dearborn Financial Services, Inc. "There are opportunities to take advantage of now and over the next decade," she told New York Life in an exclusive interview.

First, you can pump up your IRA contributions beyond the increases for those under age 50. Across the board, all eligible individuals can gradually increase their contributions from $3000 per person in 2003 up to $5,000 a year by 2008. Plus, if you are over age 50, you can make "catch-up" contributions into your IRA, starting with $500 in 2003, up to $1,000 by 2006.(Quick Reference Guide to The Economic Growth and Tax Relief Reconciliation Act of 2001, Dearborn Financial Publishing, 2001)

Year IRA Max
Catch-Up Contribution
(Age 50+)
2002 $3,000 $500
2003 $3,000 $500
2004 $3,000 $500
2005 $4,000 $500
2006 $4,000 $1,000
2007 $4,000 $1,000
2008+ $5,000 $1,000

What do the numbers mean to you?
They can add up over time. For example, let's say you are 50-years-old and plan to retire at age 65. Under the old law, you could have contributed $2,000 a year into an IRA. The new created an opportunity for heftier contributions. Here are how the before-and-after numbers look:

How an IRA Will Grow From Age 50 to 65
(Assuming Maximum Annual Contributions)

  Old Law New Law
Total Contributions to Age 65: $30,000 $79,000
Total Account Value at Age 65: $52,236 $134,422

Assumed average rate of return: 7.5%, compounded annually. Also assumes maximum contribution limits will continue beyond 2010, when, unless Congress acts, limits could return to 2001 levels. Calculations based on standard compound interest and annuity tables.

This is a hypothetical example intended for illustrative purposes only and is not indicative of the actual performance of any particular product.

Contributions under the new law include $66,000 in standard IRA contributions plus another $13,000 in "catch-up" contributions over the 15 years. The real payoff is in the more than $82,000 in additional money waiting at age 65, based on an assumed rate of return of 7.5% compounded annually.

Second, take advantage of employer-sponsored plan "catch-up" provisions. There are some big-buck opportunities here. If you're over age 50, the catch-up provisions under the new law increase the annual limit on elective deferrals to qualified cash or deferred arrangements — which include 401(k) plans, 403(b) plans, and section 457 plans sponsored by state and local governments (though not tax-exempt organizations) — by $1,000 a year, since 2002, reaching $5,000 a year in 2006.

For SIMPLE plans, the limits increase annually by $500, since 2002, until the catch-up amount reaches $2,500 in 2006.

Once again, these increases are on top of general plan increases for all qualified individuals. Under these increases, contribution limits for 401(k) plans, 403(b) plans and salary reduction SEPs go from $10,500 to $15,000 by 2006. Additionally, maximum annual deferrals to SIMPLE plans will increase from $8,000 in 2003 to $10,000 by 2005.

Plus, since 2002, the limit on annual additional payments to a defined contribution plan will increase to $40,000 (from $35,000), while the annual limit on benefits paid under a defined benefit plan will rise to $160,000 (from $140,000).

In short, between the "catch-up" provisions for IRAs and employer-sponsored plans, the opportunities become fairly significant, creating a golden opportunity to pump up retirement savings.

review your qualified plan distribution options. Under the old law, you had to select your Required Minimum Distribution (RMD) option before your distributions began. Once elected, your option was locked in for good, even if your beneficiary died or you divorced, explains Shropshire. "The rules were complicated and difficult. Most of all, this caused major problems at death.

"That has all changed with the 2001 law," says Shropshire. "Now, there are no more elections. Your minimum distribution is based on a uniform distribution table." (There are some exceptions, such as if your spouse is more than 10 years your junior.) "For the majority of people, this means that, while you can take as much as you like, your required distribution is less every year."

More on distribution rules
In the past, says Shropshire, qualified money was distributed at death. "Now, however, distributions can be stretched over the life of the beneficiary. If you make your granddaughter the beneficiary of your qualified money, she can receive benefits over her entire life.

"To say the least, this is a huge benefit for affluent individuals," stresses Shropshire, "creating a need for post-death planning in many cases."

One word of caution: All the provisions of the 2001 law are scheduled to "sunset" at the stroke of midnight on December 31, 2010. While nobody really knows what will happen between now and then, it is important to take advantage of these provisions while they are the law of the land to salt away as much money as possible between now and then for your retirement.

Suggestion: Meet with your New York Life Agent and your other financial advisors to discuss ways to maximize your qualified plan contributions and get the best value for your distributions.

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If You're Over Age 50... How to Profit From the New Tax Law in 2002 and Beyond

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