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A Decade of Opportunity Awaits Older Workers

Thanks to the 2001 tax law, nine years (2002-2010) of opportunity to save tax-deferred for retirement await American workers, especially those born in 1952 or earlier. Increased retirement plan contribution amounts, coupled with extra "catch-up" savings and the magic of compound interest, can greatly enhance your future financial security. These changes are especially attractive to late savers and those who currently "max out" (contribute the maximum allowed) their retirement plan savings and want to save more.

The reason for this limited "window of opportunity" is a "sunset" provision placed in the tax bill, effective December 31, 2010, to ensure compliance with the Congressional Budget Act of 1974. If the 2001 tax law changes are not made permanent by a future Congress, retirement plan contribution limits will revert to 2001 levels in 2011 and catch-up provisions will be eliminated. The uncertainty caused by this tax law quirk, therefore, creates an added incentive to make the most of tax advantaged savings opportunities while they exist. As they say in agriculture, "make hay while the sun shines."

Starting in 2002, there will be higher contribution limits for both individual retirement accounts (IRAs) and tax-deferred employer retirement plans such as 401(k)s, 403(b)s, and Section 457 plans. These higher limits are available to all workers with earned income regardless of age. In addition, there is a special catch-up provision for people age 50 and older. Contribution limits and catch-up amounts will both be increasing gradually from 2002 through 2010.

The chart below lists the maximum contribution amounts that persons age 50 and over can contribute to IRAs and tax-deferred employer plans starting in 2002:

IRAs (Roth or Traditional)
2002-04- $3,000 + $500 catch-up ($3,500 total)
2005    - $4,000 + $500 catch-up ($4,500 total)
2006-07- $4,000 + $1,000 catch-up ($5,000 total)
2008-    $5,000 + $1,000 catch-up (6,000 total)
After 2008- maximum IRA contributions are inflation adjusted in $500 increments

401(k), 403(b), and 457 Plans
2002-    $11,000 + $1,000 catch-up ($12,000 total)
2003-    $12,000 + $2,000 catch-up ($14,000 total)
2004-    $13,000 + $3,000 catch-up ($16,000 total)
2005-    $14,000 + $4,000 catch-up ($18,000 total)
2006-    $15,000 + $5,000 catch-up ($20,000 total)
After 2006- maximum employer plan contributions are inflation adjusted in $500 increments

While these increased contribution limits sound wonderful, in reality they will probably affect a small minority of taxpayers. This is because only about 10 percent of workers currently save the maximum allowed by their employer retirement plan. For those who do take advantage of the higher contribution limits for 401(k)s, 403(b)s, and 457 plans, however, it is estimated that they would save $20,500 more than they would have with the inflation adjustments allowed under the previous tax law.

For older workers who are also eligible for the catch-up provision, an additional $35,500 can be contributed through 2010. The grand total: $56,000 of tax-deferred savings, plus the earnings on that investment and possible additional employer matching (although most employers cap their match at 6% to 10% of a worker's salary so saving more may not trigger any additional match).

T.Rowe Price, an investment company, calculated that individuals age 50 and over who are eligible to make the maximum annual contribution (including catch-up savings), to both an employer plan and an IRA, could invest a total of $215,500 tax-deferred for ten years starting in 2001. This would result in an accumulation of $355,900, assuming a 10% average annual return. After 15 and 20 years of growth, the accumulations increase dramatically to $747,800 and $1,378,800.

Hopefully, this article has convinced you that relatively small savings amounts can grow significantly over time. In addition, even if you have saved little to date for retirement, you have a tremendous opportunity over the next decade to do so. Generous tax breaks like these don't come along very often and they may not last beyond 2010. For additional information about tax-deferred investing, visit the Cooperative Extension Investing For Your Future home study course Web site at www.investing.rutgers.edu and click on Unit 7.

This message is sponsored by Rutgers Cooperative Extension. For further information about available educational programs and other services, contact your local Rutgers Cooperative Extension office.