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U.S. Tax Bill Expands Pension Options for Seniors

Mon, 06/04/2001 - 12:00am — Karen Stevenson
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The tax relief bill just passed by Congress and awaiting President Bush's signature has some interesting provisions in addition to the income tax and estate tax relief everyone is talking about. One of the most important is that beneficiaries age 50 and older may be allowed to make supplemental "catch-up" IRA contributions of $500 in 2002, gradually increasing to $2,000 in 2011. Supplemental "catch-up" voluntary contributions to some 401(k) and other pension plans are also permitted for beneficiaries age 50 and older, capped at $500-$1,000 in 2002 and increasing to $2,500-$5,000 in 2011, depending on the type of plan.

The bill provides a number of ways to help taxpayers build retirement assets. IRA contribution limits are increased from the current $2,000 a year to $2,500 in 2002 and $5,000 a year by 2011. Vesting schedules are shortened and contribution limits increased for some other employee pension plans, and the bill makes it easier to move funds from one retirement plan to another to make pensions more "portable".

In addition, the bill provides for a tax credit to offset IRA and pension contributions by low-income taxpayers, which reduces the actual out-of-pocket cost of those contributions by up to 50%. These are targeted to married taxpayers with adjusted gross income (AGI) no more than $50,000 ($37,500 for heads of household and $25,000 for singles).

The bill also provides that IRA funds can be contributed to qualified charitable organizations without being taxable to the individual who makes the contribution, which creates a new gifting opportunity for people who have retirement assets they don't need.

Grandparents who want to make gifts to grandchildren may be interested in an expansion of the Education IRA. The annual contribution has been increased from $500 to $2,000, and the definition of "qualified educational expenditures" for which the funds can be used has been expanded to include expenditures for children in grades 1-12, including the cost of computer hardware and Internet access, contributions to Section 529 college tuition programs, payments for private school tuition, and the cost of tutoring, classes, or other special needs. Previously, funds in these IRAs could only be used for college costs.

The tax relief bill just passed by Congress and awaiting President Bush's signature has some interesting provisions in addition to the income tax and estate tax relief everyone is talking about. One of the most important is that beneficiaries age 50 and older may be allowed to make supplemental "catch-up" IRA contributions of $500 in 2002, gradually increasing to $2,000 in 2011. Supplemental "catch-up" voluntary contributions to some 401(k) and other pension plans are also permitted for beneficiaries age 50 and older, capped at $500-$1,000 in 2002 and increasing to $2,500-$5,000 in 2011, depending on the type of plan.

The bill provides a number of ways to help taxpayers build retirement assets. IRA contribution limits are increased from the current $2,000 a year to $2,500 in 2002 and $5,000 a year by 2011. Vesting schedules are shortened and contribution limits increased for some other employee pension plans, and the bill makes it easier to move funds from one retirement plan to another to make pensions more "portable".

In addition, the bill provides for a tax credit to offset IRA and pension contributions by low-income taxpayers, which reduces the actual out-of-pocket cost of those contributions by up to 50%. These are targeted to married taxpayers with adjusted gross income (AGI) no more than $50,000 ($37,500 for heads of household and $25,000 for singles).

The bill also provides that IRA funds can be contributed to qualified charitable organizations without being taxable to the individual who makes the contribution, which creates a new gifting opportunity for people who have retirement assets they don't need.

Grandparents who want to make gifts to grandchildren may be interested in an expansion of the Education IRA. The annual contribution has been increased from $500 to $2,000, and the definition of "qualified educational expenditures" for which the funds can be used has been expanded to include expenditures for children in grades 1-12, including the cost of computer hardware and Internet access, contributions to Section 529 college tuition programs, payments for private school tuition, and the cost of tutoring, classes, or other special needs. Previously, funds in these IRAs could only be used for college costs.