Good (retirement) things come to those who wait

NEW YORK -- The tax cut package approved by Congress last weekend contains a half-dozen provisions that will make it easier for Americans to save for retirement.

But don't rush to the bank. Most of the new contribution limits for Individual Retirement Accounts, Roth IRAs and 401(k)-style savings plans don't kick in until next year, and some won't be fully phased in until 2008.

In the meantime, "it wouldn't be a bad idea to re-evaluate where you are" so you're able to take advantage of the changes starting in 2002, said Steve Garrett, manager for financial planning at A.G. Edwards & Sons Inc. of St. Louis, Mo.

"There are certainly a lot of positives in the legislation," Garrett said. "The best benefits will be felt by the disciplined savers out there -- people who take full advantage of the new limits."

For many Americans, that means getting started. Although Americans have amassed an estimated $9.5 trillion in retirement savings, more than half of the nation's wage earners still don't participate in company-sponsored retirement savings plans, according to the Employee Benefit Research Institute in Washington. Less than one-third of families have IRA accounts, the EBRI said.

That makes one provision in the package -- "catch up" contributions for workers 50 and over -- very important, said J. Michael Scarborough, president and chief executive of the Scarborough Group Inc. of Annapolis, Md., which helps individuals manage 401(k) accounts.

"When people figure out what it is and how to use it, it should be big," he said.

The law will allow older Americans to put an extra $500 into their IRAs next year and through 2005, and $1,000 a year after that. They'll be able to save an additional $1,000 next year in 401(k) and other tax-deferred accounts, with the catch up provision increasing $1,000 each year to a total of $5,000 in 2006. And that's above the increased limits for both types of accounts.

"If early in your career, you were not able to put aside money for retirement, you can go back and make up for some of that," Scarborough pointed out. "It's especially true for women who left the work force to raise children and missed some (savings) opportunities."

Everyone will be able to take advantage of increased IRA and 401(k) contribution limits.

For traditional and Roth IRAs, the annual contribution limit will rise from the current $2,000 a year -- which has been in place since 1981 -- to $3,000 from 2002 through 2004, $4,000 from 2005 through 2007, and $5,000 starting in 2008. Thereafter, there will be periodic increases for inflation.

The limits on 401(k) accounts and similar retirement accounts will rise to $15,000 from the current $10,500. The pretax dollar limit rises to $11,000 next year, then increases an additional $1,000 a year through 2006. The figure will be adjusted for inflation in subsequent years.

There also are provisions in the law that make it easier for workers to transfer retirement savings when they change jobs. And starting in 2006, some companies will be able to create Roth-style 401(k) plans that will enable Americans to invest after-tax dollars for retirement -- and withdraw their savings tax-free. Families with income below $50,000 may qualify for tax credits on some of their retirement savings from 2002 through 2006.

"We know that people have a lot of financial demands on them, like saving for the education of their children or buying a house," Scarborough said. "But they also need to think hard about retirement."

His advice: "Aim for those new limits."

On The Net:

www.agedwards.com

www.ebri.org

www.sgi401k.com