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Cover Story

President's Message

Retirement

Family Finance

Personal Finance

Estate Planning

Financial Planning

Consumer Tips

New Contribution Limits

401(k)*, 403(b) and 457 employer-sponsored retirement plans

Roth and Traditional IRA

*The ceiling on 401(k) contributions is also dictated by the particular rules of individual empolyers.

How the New Tax Law Will Help You Save
Higher limits and relaxed distribution requirements start in 2002.

This is the third feature of a three-part series on retirement planning.

o matter how many years you have until retirement, the prospect of building a nest egg can be daunting. But take heart. A number of new laws governing tax-deferred and tax-free savings accounts will make it much easier for investors to fund a long and comfortable retirement.

The biggest boon to savers is the new tax bill that was passed in June. The new law relaxes some of the restrictions on retirement accounts like 401(k)s and IRAs and creates new opportunities for tax-sheltered savings. But that's not all. Other new rules went into effect earlier this year that change withdrawal requirements from tax-sheltered retirement accounts, allowing retirees to get much more mileage out of the tax advantages. In all, the changes make the tax perks of retirement-savings plans even more valuable. Here's what's new:

Increased contributions
One of the biggest benefits of the new tax law is that it will let you contribute more to your retirement plans.

Contribution limits will rise over the next seven years for all investors, but those aged 50 or over can put away even more, thanks to “catch-up” provisions in the law (see charts below). So if you've been diligent about saving, the changes will let you fortify your nest egg with some extra padding. And if you have procrastinated, now you'll have a much better chance of making up for lost time.

In 2002, the tax-deductible contribution for Simplified Employee Pensions and Keoghs (plans for self-employed workers) will rise to 25% of compensation or up to $40,000 annually, whichever is less.

For Simple-IRA plans offered by small employers, the current $6,500 maximum contribution will rise to $7,000 in 2002 and then by $1,000 in each of the next three years, to $10,000 by 2005. Limits will rise with inflation after that.

More retirement accounts can be rolled over
The previous law prohibited participants in 403(b) plans--mostly for employees of non-profits and educational institutions--from rolling their money into a new employer's 401(k). The rollover situation for state and local government employees in 457 plans was even stricter: Rollovers to either a new employer's 401(k) or an IRA after retirement were not allowed.

The new tax bill fixes this problem, allowing all of these workers to take advantage of a new employer's 401(k) plan or an IRA if they retire.

Friendlier distribution rules
Thanks to new rules that went into effect in January, the withdrawal requirements from 401(k)s, IRAs and other retirement plans are much more favorable for retirees.

Retirees must begin taking annual distributions from their retirement accounts once they reach 70½ years old. But under old regulations, figuring out how much to withdraw was complicated, involving life expectancy computations.

The new rules simplify the process by allowing all retirees to use a uniform life-expectancy table. They also reduce the minimum amount that retirees are required to withdraw each year. This allows more money to stay in your account growing tax-deferred for a longer period.
Navy Federal offers a wide variety of savings programs for retirement with guaranteed returns. And the direct transfer of funds from another financial institution or mutual fund is welcome. Call 1-800-362-3789, weekdays, 7:30 am to 7:30 pm, Eastern time, for transfer information.