When planning this year's tax strategy, take advantage of tax benefits offered by retirement plans. Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, you can save up to $11,000 in a 401(k) plan this year. The maximum contribution will rise $1,000 a year until 2006, when it reaches $15,000.
The tax law changes also provide incentives to launch a retirement plan. For example, business owners "can get a loan from these plans under the same rules as everybody else," says Karen Field, a senior manager in KPMG's Washington, DC, national tax practice. Business owners didn't like locking up capital in a 401(k) plan without the ability to get it out in emergencies, she says.
Individuals 50 years old or older can also save more for retirement and receive generous tax benefits by contributing an additional catch-up amount of $1,000 to a 401(k) plan. The limit will rise $1,000 a year until 2006, when catch-up contributions hit $5,000 annually. They may also contribute an additional $500 to SIMPLE plans.
The total compensation on which 401(k) contributions are based also increases. The maximum now includes contributions made by employee and employer. The ceiling has also increased to the lesser of $40,000 or 100 percent of salary.
Take time to understand the latest retirement plan changes. You're sure to benefit in the long run.
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 14 years.
- KPMG LLP (202) 467-3800, firstname.lastname@example.org