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Tax Tip of the Week
For the week of
January 28, 2002

Shave more from your tax bill this year

Last year's tax law made sweeping changes to the retirement plan rules. One major change is an increase in contribution limits, beginning this year. The tax benefits of making larger contributions are twofold: Contributions to most plans are tax-deductible, and the amount you invest can grow tax-deferred until you withdraw the money.

Fund your IRA. The annual contribution limit for IRAs increased from $2,000 to $3,000 this year. There are still two types of IRAs to choose from. With a traditional IRA, you may receive a tax deduction now, but you'll have to pay tax on future withdrawals. (Caution: If you have a company retirement plan at work and your income exceeds certain levels, your traditional IRA contribution may not be deductible.) Roth IRA contributions aren't tax-deductible, but qualified withdrawals are tax-free.

Set aside more in your employer's plan. You can contribute up to $11,000 of your salary to a 401(k) plan this year, if your employer offers one. If you're in the 27% tax bracket, this could shave almost $3,000 off your 2002 tax bill. The 2002 SIMPLE plan deferral limit is $7,000.

Catch-up with additional contributions. Congress recognizes that many people are behind the eight ball in saving for retirement. So they've provided a way for older taxpayers to save more. If you are 50 or over by the end of 2002, you can contribute an additional $500 to an IRA or SIMPLE plan. The additional catch-up limit for 401(k) plans is $1,000 for 2002. Both the catch-up limits and the regular contribution limits will increase in the coming years.

If you'd like more information on how to use the new retirement plan rules to cut your taxes, give us a call.

Prior Tax TipsClick here to view previous tax tips.

"Tax Tips" are published weekly to provide useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders, and current tax information.

The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

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