Thursday, January 3, 2002

New savings plan
no use in Hawaii

By John Wasik
Bloomberg News

CHICAGO >> Congress has given those saving for retirement or college a little more to celebrate in the New Year, but some states may spoil the party.

A new federal law, the Economic Growth and Tax Relief Reconciliation Act of 2001 -- called EGTRRA -- raised limits starting Jan. 1 on retirement plan contributions and college savings plans, and allows for enhanced pension portability through 2010.

But not every state has given a green light to the new benefits under their tax codes. That means you may face a penalty or additional state taxes if you try to add more money to your nest egg in those states that haven't approved the new EGTRRA contribution limits.

An estimated 40 million workers in 15 states are in limbo unless their state legislators act. That's about one-third of non- farm employment, according to the U.S. Census Bureau.

According to Ed Ferrigno at the Profit Sharing/401(k) Council of America, a trade group representing major employers, the non-conforming states are: Arizona, Arkansas, California, Hawaii, Idaho, Indiana, Iowa, Kentucky, Maine, Massachusetts, Mississippi, North Carolina, Pennsylvania, South Carolina and Wisconsin.

As a result, Andi Kang, a certified financial planner and investment adviser in Huntington Beach, Calif., says she can't recommend to her clients that they increase their 401(k) or IRA contributions, which is standard advice for most financial advisers.

"If a California taxpayer tries to claim higher (retirement plan) contributions, then they could face a fine," Kang said.

Since states have sovereignty over how they tax their residents, they can refuse to automatically agree to all changes in the Internal Revenue Code. If you are in a "nonconforming state," that means your state legislature did not pass laws to allow the higher EGTRRA contributions.

The dark side of the statehouse delays is that states will lose tax revenue by approving EGTRRA in a time of escalating state budget deficits.

In California, for example, the state treasury may lose an estimated $151 million from EGTRRA, according the American Benefits Council, an employer trade group. The ABC has sent a letter to the California legislature urging EGTRRA approval, which has scheduled hearings on the law.

John Scott, director of retirement policy for the ABC, said there's no reliable estimate of when or if the state legislatures will approve the federal code.

ABC's Scott notes if the nonconforming states don't approve EGTRRA, state tax authorities may have to track down and send additional tax bills to residents who raise their retirement contributions. Still, few states are set up to do this sort of tax- police work, and they may lack the funding to make much of an effort at enforcing the rule, Scott says.

"There are costs to nonconformity," he said. "States may not have the resources to enforce nonconformity."

Giving you a leg up on saving for retirement was one of the main benefits in EGTRRA, the most sweeping reform of pension, estate and college savings law in a generation. Here are the highlights:

>> 401(k)/402(b) annual maximum contributions rise to $11,000 in 2002 from $10,500 in 2001. The limit will rise to $15,000 by 2006.

>> Traditional and Roth IRA contribution limits rise to $3,000 a year in 2002 from $2,000, if you qualify. The limit will rise to $4,000 in 2006.

>> Self-employed workers with SEP-IRAs or Keoghs can contribute a maximum of $40,000, up from the previous limits of $25,500 for SEP-IRAs and $35,000 for Keoughs in 2001.

>> Workers 50 or older can add an additional $1,000 to all but the SEP-IRA and Keogh plans next year. This "catch-up provision" is capped at $5,000 by 2006.

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