How New Tax Law Affects TSAs
By Jim DiUlio
The rules have changed when it comes to saving for your retirement.
When President Bush signed his tax-cut package into law last summer,
he ushered in sweeping changes that will affect tax-sheltered annuities
(TSAs) in 2002. The new rules mean higher contribution limits, easier
rollovers, and a new catch-up option.
Heres a breakdown on what the changes mean to public school employees.
How much can you contribute?
The new rules simplify contribution limits, starting with elimination
of the Maximum Exclusion Allowance part of a complex calculation
that helps determine how much you can contribute to your TSA.
Under the new rules, you will be able to set aside up to $11,000 in pretax
contributions (elective deferrals) for 2002. Thats an increase from
the current $10,500 per year. This amount will go up $1,000 each year
until 2006, when it reaches $15,000.
The new law retains the limit on combined employee and employer (if any)
contributions, but it increases the amount. Current rules cap these contributions
at $35,000 or 25% of salary, whichever is less. The new law increases
this limit to the lesser of $40,000 or 100% of compensation.
These changes could help lower-income employees set aside more money
for retirement. For instance, under the old rules, someone making $32,000
per year would have been limited to an $8,000 contribution (25% of pay).
In 2002, that same person will be able to contribute $11,000 in 2002.
For those who are 50 or older, the law provides an opportunity to put
some extra money into a TSA. Next year, for example, an employee over
50 will be able to make a catch-up contribution of $1,000 on top of the
nominal $11,000 limit. The limit on this annual catch-up contribution
will go up $1,000 per year until 2006, when it reaches $5,000.
The new law also maintains an existing catch-up provision for TSAs, reserved
for workers after 15 years with the same employer. Under this feature,
you may be able to set aside an additional $3,000 per year for five years,
although there may be some restrictions.
Another change increases your ability to move money from one retirement
account to another, also known as portability. Under current rules, funds
may not be rolled over between different types of tax-deferred savings
plans such as TSA, 401(k), and 457(b) plans (which cover some government
and nonprofit employers) at any time, even if you were to change jobs.
Under the new rules, you will be able to easily roll over your money
into another retirement plan. You also still have the option of transferring
your TSA savings into an IRA if you choose.
The new federal rules will allow the tax-free transfer of TSA savings
to purchase service credits in the Wisconsin Retirement System state pension
plan. However, the WRS will need to review existing statutes and regulations
before it can implement this option. Current law offers no provisions
for the purchase of service credits in governmental defined benefit plans.
Posted November 20, 2001