The "Economic Growth and Tax Relief Reconciliation Act of 2001" (EGTRRA of 2001), among other things, contains numerous provisions that affect retirement plans.  This article discussions some of those provisions.

First of all, let's talk about what the EGTRRA of 2001 did NOT do.

A. It did NOT increase the income limitations for determining IRA deductibility for individuals who either participate in employer plans, or who have spouses who do.

B. It did NOT increase the income limitations for eligibility to contribute to Roth IRAs.

C. It did NOT increase the income limitation for eligibility to convert to a Roth IRA. There was a provision in last year's proposed bill that would have increased the income limitation for married couples from the current $100,000 to $200,000. That provision was nowhere to be seen in this year's bill.

D. Despite a provision in the House passed version of the bill, the final version of the bill does NOT have a provision that lowers the excise tax (penalty) for failure to take a required distribution from an IRA or other retirement account from 50% to 10%.

E. Despite a provision in the Senate passed version of the bill, the final version of the bill does NOT change the rule for distributions to beneficiaries of decedents who die after the required beginning date for mandatory distributions. The Senate provision would have actually been less advantageous than the provision in the January, 2001 Proposed Regulations. I guess someone in Washington finally read the Proposed Regs.

F. Despite a provision in the Senate passed version of the bill, the final version of the bill does NOT permit an individual age 70½ or older to assign IRA benefits directly to a charity. The Senate version was effective for year 2009, so this is no major immediate consequence

Now, on to what the new law DOES do.

1. The law increases the IRA contribution limits, in stages, starting in 2002. The law also allows taxpayers age 50 and older to make additional contributions. The contribution limits for IRAs are as follows:

  
            Year            Regular            Over 50
            2002             $3,000             $3,500
            2003             $3,000             $3,500
            2004             $3,000             $3,500
              2005             $4,000             $4,500
              2006             $4,000             $5,000
            2007             $4,000             $5,000
            2008             $5,000             $6,000

After 2008, the $5,000 regular contribution limit is indexed for inflation.

2. The law creates a new phenomenon called a "deemed IRA". A "deemed IRA" will exist when an employer plan permits an employee to make voluntary contributions to a separate account or annuity. If the separate account or annuity is established under the plan, and the account or annuity otherwise meets the requirements of either a traditional IRA or a Roth IRA, then such separate account or annuity will be treated for all purposes of the Code as either the traditional or Roth IRA. The eligibility to contribute to the deemed Roth IRA or the ability to deduct the contribution to the deemed traditional IRA, will still follow current income limitations.

3. The law increases the contribution limits for 401(k) plans, 403(b) plans, and 457 plans, in stages, starting in 2002. The law also allows taxpayers age 50 and older to make additional contributions. The contribution limits for these plans are as follows:

   Year          Regular         Over 50

            2002         $11,000         $12,000
            2003         $12,000         $14,000
            2004         $13,000         $16,000
            2005         $14,000         $18,000
            2006         $15,000         $20,000

Both the regular contribution limit and the over 50 additional contribution limit will be indexed for inflation after 2006.  The additional contribution for individuals over the age of 50 is NOT subject to the anti-discrimination rules or other limitations, other than total contributions cannot exceed the earnings. Thus, an individual in 2002 who is over 50 could contribute the extra $1,000 even though other plan provisions may limit his 401(k) contribution to, for example, $6,000.

4. The maximum contribution to a defined contribution plan will be $40,000 effective in 2002, and will thereafter be indexed for inflation in $1,000 increments. Current law was indexing this limit in $5,000 increments.

5. The maximum benefit under defined benefit plans will increase to $160,000, effective in 2002. The maximum benefit will be reduced for retirement prior to age 62, and increased for retirement after age 65.

6. The maximum amount of compensation that can be used to determine a contribution to a defined contribution plan will be increased to $200,000 in 2002, and will thereafter be indexed for inflation in $5,000 increments. The current law indexed this maximum in $10,000 increments.

7. Effective in 2002, the maximum percentage of compensation that can be contributed to a profit sharing plan, including a SEP, is increased from 15% to 25%. This means that self-employed individuals or small business owners will be able to maximize their annual contributions without the need for a money purchase plan. With a profit sharing arrangement, an owner whose compensation is at or above the maximum ($200,000 in 2002) will be able to reduce the percentage and still contribute the maximum, while reducing the contributions for the other employees. There is a glitch in the law concerning SEPs that would cause the excess over 15% to be taxed to the employee. This should hopefully be fixed sometime in 2002 by a technical correction to the law.

8. The law increases the contribution limits for SIMPLE plans, in stages, starting in 2002. The law also allows taxpayers age 50 and older to make additional contributions. The contribution limits for SIMPLE plans is as follows:

   Year          Regular         Over 50

            2002         $7,000          $7,500
            2003         $8,000          $9,000
            2004         $9,000          $10,500
            2005         $10,000        $12,000
            2006         $10,000        $12,500

The $10,000 regular contribution limitation will be indexed for inflation in $500 increments starting in 2006. The $2,500 over 50 limitation will be indexed in $500 increments starting in 2007.

9. Small businesses, including self employed individuals, can utilize a 401(k) plan in conjunction with a profit sharing plan to increase potential retirement contributions, subject to the $40,000 contribution limit.