Gathering Places
Gathering Places
The $1.35 trillion tax bill recently passed by Congress provides a great opportunity for Americans -- but it may not be the one everyone is talking about. While most of the attention has focused on the reduction in marginal tax rates, the marriage penalty relief, the increase in the per-child tax credit and the tax rebate, the real benefit may be found in the bill's retirement security and pension reform provisions. The tax bill’s
other benefitsMany experts believe we are facing a retirement saving crisis in America. Recent studies show half of the U.S. work force has no retirement plan. Only one in four small business employees has a pension plan -- one in five for businesses with 25 or fewer employees.
Our retirement and pension laws have not kept pace with inflation and our increasingly mobile and aging population -- after adjusting for inflation, workers in 1980 could save more for retirement than can workers today.
The bottom line, for a large number of Americans, is the dream of a comfortable retirement is just that -- a dream.
Thankfully, Congress has provided Americans with more opportunities to save for retirement by passing a comprehensive tax bill. The key is to know where the real opportunity lies.
Rather than focus solely on a refund check, think of the bill as a tool to help you invest for the long term in the areas of education, retirement and estate planning. The following is only a sample of the many provisions that could be used to your advantage:
>> Education -- The bill provides strong incentives to save for education. The Education IRA annual contribution limit increases to $2,000 from $500 in 2002 and distributions can now be used for K-12 costs. In addition, tax-free distributions from qualified tuition saving programs are allowed, student loan deductibility income limits are expanded and there is a significant above-the-line deduction for higher education expenses.By passing a comprehensive tax bill, Congress updated many of nation's retirement and pension laws and provided Americans with more incentives to save and invest. Now it is up to individuals, working with their accounting, tax and financial advisors to consider their options and implement financial plans appropriately incorporating these new legislative changes.>> Retirement -- The bill gradually increases the amounts you can contribute to retirement accounts and provides for expanded permitted rollovers among various types of plans and IRAs. By 2008, the Traditional and Roth IRA contribution limits rise to $5,000 from the current $2,000. By 2006, limits on elective deferrals for 401(k), 403(b) and other defined contribution plans rise to $15,000 from the current $10,500 in 2001. The legislation also provides for "catch-up" provisions allowing those age 50 and older to contribute larger amounts to their retirement accounts -- viewed by many as a much-needed provision for women who are re-entering the work force after taking time to raise children.
>> Estate planning -- The bill includes significant changes for estate planning, including increasing the unified credit and reducing estate tax rates over the next decade. Although many Americans fail to adequately implement estate planning into their financial plans, it is a critical segment of financial planning and should not be overlooked.
Jin Y. Chu is a financial adviser
in the Honolulu office of American
Express Financial Advisors Inc.