IRAs & Other Retirement Plans
2002 Changes

New Credit for Contributions to
Retirement Plans and IRAs (Saver’s Credit)

Beginning in 2002, if you make eligible contributions (defined later) to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA), you may be able to take a tax credit. The amount of the saver’s credit you can get is based on the contributions you make and your credit rate. Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate.

Your credit rate also depends on your filing status. See Table 3– 1 to determine your credit rate.

Table 3–1. Saver’s Credit Rate

The maximum contribution taken into account is $2,000 per taxpayer. On a joint return, up to $2,000 is taken into account for each spouse.

Who cannot claim the credit. You cannot claim the credit if any of the following apply.

1. You are under age 18
2. You are a full-time student (explained later).
3. Someone else, such as your parent(s), claims an exemption for you on their tax return.
4. Your adjusted gross income (defined later) is more
   a) $50,000 if your filing status is married filing jointly,
   b) $37,500 if your filing status is head of household, or
   c) $25,000 if your filing status is either single, married filing separately, or qualifying widow(er).

Full-time student. You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either:

• A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or
• A student taking a full-time, on-farm training course given by a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance or a state, county, or local government.

You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full-time.

Adjusted gross income. This is generally the amount on the line labeled adjusted gross income at the bottom of page 1 of your 2002 Form 1040 or Form 1040A. However, you must add to that amount any exclusion or deduction claimed for the year for:

• Foreign earned income,
• Foreign housing costs,
• Income for residents of American Samoa, and
• Income from Puerto Rico.

Eligible contributions. These include contributions to a traditional or Roth IRA and salary reduction contributions to a 401(k) plan (including a SIMPLE 401(k)), a section 403(b) annuity, an eligible deferred compensation plan of a state or local government (a governmental 457 plan), a SIMPLE IRA plan, or a salary reduction SEP. They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment.

Contributions reduced. Your eligible contributions are reduced by the sum of: Any taxable distribution from a qualified retirement plan or from an eligible deferred compensation plan that you receive during the testing period (defined later), and

• Any distribution from a Roth IRA or a Roth account that you receive during the testing period and that is not a qualified rollover contribution to a Roth IRA or a rollover to a Roth account.
• A distribution from a Roth IRA that is not rolled over reduces your eligible contributions, even if the distribution is not taxable.

A distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit does not reduce your eligible contributions if:

1. The distribution is made before the due date (including extensions) of your tax return for that year,
   
2. You do not take a deduction for the contribution, and
   
3. The distribution includes any income attributable to the contribution.

Distributions received by spouse. Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit.

Testing period. The testing period consists of the year for which you claim the credit, the period after the end of that year and before the due date (including extensions) for filing your return for that year, and the 2 tax years before that year.

Maximum eligible contributions. After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person.

Maximum credit. The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not taking into account any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope credit, then you will not be entitled to this credit.

Termination of credit. This credit is not available for tax years beginning after 2006.

Individual Retirement Arrangements (IRAs)

For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

Increased Traditional IRA Contribution and Deduction Limits

The most that can be contributed to your traditional IRA for 2002 is the lesser of:

• $3,000 (up from $2,000), or
• Your compensation that you must include in income.

If you are 50 or older in 2002, the most that can be contributed to your traditional IRA for 2002 is the lesser of:

• $3,500 (up from $2,000), or
• Your compensation that you must include in income.

For more information, see How Much Can Be Contributed? in chapter 1 of Publication 590.

Besides being able to contribute a larger amount in 2002, you may be able to deduct a larger amount. See How Much Can I Deduct? in chapter 1 of Publication 590.

Increased Roth IRA Contribution Limit

If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2002 generally is the lesser of:

• $3,000 (up from $2,000), or
• Your compensation that you must include in income.

If you are 50 or older in 2002 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2002 generally is the lesser of:

• $3,500 (up from $2,000), or
• Your compensation that you must include in income.

However, if your modified adjusted gross income is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? in chapter 2 of Publication 590.

Increased Contributions to Both Traditional and Roth IRAs

If contributions are made on your behalf to both a Roth IRA and a traditional IRA, your contribution limit for 2002 is the lesser of:

• $3,000 ($3,500 if you are 50 or older in 2002) (up from $2,000) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or
• Your compensation that you must include in income minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

However, if your modified adjusted gross income is above a certain amount, your contribution limit may be reduced.

For more information, see How Much Can Be Contributed? in chapter 2 of Publication 590.

Rollovers From Traditional IRAs Into Qualified Plans

You can roll over tax free a distribution from your traditional IRA made after 2001 into a qualified plan. The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Rules applicable to other rollovers, such as the 60-day time limit, apply. For more information about rollovers, see Rollovers in chapter 1 of Publication 590.

Tax Treatment of Rollovers From an IRA Into an Eligible Retirement Plan Other Than an IRA

For distributions made after 2001, if you roll over a distribution from an IRA into an eligible retirement plan other than an IRA, the part of the distribution you roll over is considered to come first from amounts other than after-tax contributions in any of your traditional IRAs. This means you can 2001,

tions into a qualified plan if you have enough taxable income in your other IRAs to cover the after-tax part. The effect of this is to maximize the amount in your traditional IRAs that you can roll over to a qualified plan.

Exception to the 60-Day Rollover Rule

Generally, a rollover is tax free only if you make the rollover contribution by the 60th day after the day you receive the distribution. Beginning with distributions after 2001, the IRS may waive the 60-day requirement where it would be against equity or good conscience not to do so.

For more information, see Time Limit for Making a Rollover Contribution in chapter 1 of Publication 590.

No Rollovers of Hardship Distributions Into IRAs

For distributions made after 2001, no hardship distribution can be rolled over into an IRA.

Qualified Plans

Deduction Limits Changed

For years beginning after 2001, the following deduction limits apply.

Profit-sharing plans. The maximum deduction for contributions to a profit-sharing plan increases from 15% to 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. Compensation for figuring the deduction for contributions includes elective deferrals.

Defined benefit plans. For plan years beginning after 2001, the maximum deduction for contributions can be as much as the plan’s unfunded current liability.

Elective deferrals. Elective deferrals will not be subject to the deduction limits that apply to qualified plans. Also, elective deferrals are not taken into account when figuring the amount you can deduct for employer contributions that are not elective deferrals.

Elective Deferrals (401(k) Plans)

The limit on elective deferrals for participants in 401(k) plans (excluding SIMPLE plans) increases for tax years beginning after 2001. The limit for 2002 and later years is as follows.

Year                                   Limit
2002 ................................$11,000
2003 ................................ 12,000
2004 ................................ 13,000
2005 ................................ 14,000
2006 and later years ................ 15,000

Note. The $15,000 limit is subject to adjustment after 2006 for cost-of-living increases.

Catch-up contributions. For tax years beginning after a plan can permit participants who are age 50 or over at the end of the plan year to make catch-up contributions. The catch-up contribution limit for 2002 and later years is as follows.

Year                          Catch-Up Limit
2002 ................................ $1,000
2003 ................................. 2,000
2004 ................................. 3,000
2005 ................................. 4,000
2006 and later years ................. 5,000

Note. The $5,000 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant’s compensation over the elective deferrals that are not catch-up contributions.

Limits on Contributions and Benefits

The efit for a participant under a defined benefit plan increases to the lesser of the following amounts.

• 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years.
• $160,000 (subject to cost-of-living increases after 2002).

For years beginning after 2001, a defined contribution plan’s maximum annual contributions and other additions (excluding earnings) to the account of a participant increases to the lesser of the following amounts.

• 100% of the compensation actually paid to the participant (up to a maximum of $200,000 for 2002 subject to cost-of-living increases after 2002).
• $40,000 (subject to cost-of-living increases after 2002).

Involuntary Payment of Benefits

A qualified plan may provide for the immediate distribution of a participant’s benefit under the plan if: The participant’s employment is terminated, and The present value of the benefit is not greater than $5,000.

For distributions made after 2001, benefits attributable to rollover contributions and earnings on the contributions can be ignored in determining the present value of these benefits.

For distributions made after the Department of Labor adopts final regulations implementing rules on fiduciary responsibilities relating to this provision, a plan must provide for the automatic rollover of any distribution of more than $1,000 to an IRA under this provision, unless the participant chooses otherwise. The plan administrator must notify the participant in writing that the distribution can be transferred to another IRA.

Plan Amendments To Conform to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Generally, master and prototype plans are amended by sponsoring organizations. However, you may need to request a determination letter regarding a master or prototype plan you maintain that is a nonstandardized plan if you make changes to adopt some provisions enacted by EGTRRA. Your request should be made on the appropriate form (generally Form 5300, Application for Determination for Employee Benefit Plan, or Form 5307, Application for Determination for Adopters of Master or Prototype, Regional Prototype or Volume Submitter Plans). The request should be filed with Form 8717, User Fee for Employee Plan Determination Letter Request, and the appropriate user fee if the fee applies (see User Fee, later).

User Fee

user fee for requesting a determination letter does not apply to certain requests made after 2001 by an eligible employer. An eligible employer is one who has 100 or fewer employees with at least one employee who is not highly compensated participating in a qualified plan. For more information, see User fee under Setting Up a Qualified Plan in chapter 4 of Publication 560, Retirement Plans for Small Business.

Simplified Employee Pensions (SEPs)

Deduction Limit Increased

For plan years beginning after 2001, the maximum deduction for contributions to a SEP increases from 15% to 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan.

Elective Deferrals (SARSEPs) Increased

For tax years beginning after 2001, the limit on elective deferrals for participants in SARSEPs will increase, and participants who are age 50 or over at the end of the plan year may be able to make catch-up contributions. For information about the new limit and catch-up contributions, see Elective Deferrals (401(k) Plans) under Qualified Plans, earlier.

SIMPLE Plans

Salary reduction contributions. The limit on salary reduction contributions to a SIMPLE plan increases after 2001. The limit for 2002 and later years is as follows.

Year                               Limit
2002 ........................... $ 7,000
2003 ............................. 8,000
2004 ............................. 9,000
2005 and later years ............ 10,000 

Note. The $10,000 limit is subject to adjustment after 2005 for cost-of-living increases.

Catch-up contributions. For tax years beginning after 2001, a SIMPLE plan can permit participants who are age 50 or over at the end of the plan year to make catch-up contributions. The catch-up contribution limit for 2002 and later years is as follows.

Year                        Catch-Up Limit
2002 ............................... $ 500
2003 ............................... 1,000
2004 ............................... 1,500
2005 ............................... 2,000
2006 and later years ............... 2,500

Note. The $2,500 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant’s compensation over the elective deferrals that are not catch-up contributions.

403(b) Plans

Recent legislation has made several changes to the way you determine the maximum amount that can be contributed to your 403(b) account. See Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations, for more information about 403(b) plans.

Changes in figuring your maximum amount contributable (MAC). In years prior to 2002, the maximum amount contributable (MAC) to a 403(b) plan generally is the least

• The maximum exclusion allowance (MEA),
• The limit on annual additions, and
• The limit on elective deferrals.

The MEA has been repealed. Therefore, MAC for years beginning after 2001 is the lesser of the limit on annual additions or the limit on elective deferrals.

Church employees. Generally, for years prior to 2002, MAC for church employees would be figured as indicated above. However, certain church employees could use a minimum exclusion allowance instead of MEA to figure MAC. For years after 2001, the minimum exclusion allowance has been repealed. Therefore MAC for church employees for years beginning after 2001 is the lesser of the limit on annual additions or the limit on elective deferrals.

Changes to the limit on annual additions. For years beginning after 2001, the alternative limits on annual additions have been repealed. Therefore, beginning in 2002, you cannot use any of the following to figure your limit on annual additions.

• The year of separation from service limit.
• The any year limit.
• The overall limit.

Increased limit on annual additions. Beginning in 2002, the limit on annual additions has increased to the lesser of $40,000 or your includible compensation for your most recent year of service. For 2001, the limit on annual additions was the lesser of $35,000 or 25% of your compensation.

Includible compensation after termination. Beginning in 2002, your includible compensation for your most recent year of service will not include money received 5 years after termination of service with your employer.

Includible compensation for foreign missionaries.

Beginning in 2002, your includible compensation for your most recent year of service does not include contributions made by the church during the year to your 403(b) account.

Increase in the limit on elective deferrals. For 2002, the limit on elective deferrals has been increased from $10,500 to $11,000. The limit on elective deferrals will increase by $1,000 each year through 2006.

Catch-up contributions for persons age 50 or older.

Beginning in 2002, if you are age 50 or older, you may be able to make additional catch-up contributions of up to $1,000 to your 403(b) account. The limit on catch-up contributions will increase each year by $1,000 through 2006.

Changes to the coordination rules between 403(b) plans and 457 plans. Beginning in 2002, if you contribute to both a 403(b) plan and a 457 plan in the same year, you do not reduce the maximum deferral limit of the 457 plan by the amount of contributions made to your 403(b) account.

If you contribute to a 457 plan in 2002, see your plan administrator for contribution limits.

Direct trustee-to-trustee transfer. If you make a direct trustee-to-trustee transfer after 2001 from your govern-mental 403(b) account to a defined benefit governmental plan, the transferred amount is not includible in gross income if it is used to purchase permissive service credits or repay contributions and earnings that were previously refunded under a forfeiture of service credit under another plan maintained by a state or local government employer within the same state.

Rollover options. Effective for distributions after 2001, you can roll over, tax free, money and other property that would otherwise be taxable from an eligible retirement plan to a 403(b) plan.

Additionally, you can roll over, tax free, money and other property that would otherwise be taxable from a 403(b) plan to an eligible retirement plan.

Section 457 Deferred Compensation Plans Limit on elective deferrals. Beginning in 2002, the special limit on elective deferrals for section 457 plans no longer applies. Deferrals under these plans are subject to the general limit for elective deferrals ($11,000 for 2002).

The special catch-up limit in the last 3 years before retirement is twice the general limit amount. Also, beginning in 2002, deferrals under section 457 plans are no longer coordinated with other plans in applying the deferral limit.

For more information on section 457 plan elective deferrals, see Retirement Plan Contributions in Publication 525, Taxable and Nontaxable Income.

Qualified domestic relations order (QDRO). Beginning in 2002, if you receive a distribution or payment under a QDRO from an eligible state or local government section 457 plan in which your spouse or former spouse is a participant, you generally must pay the tax if the distributions or payments before 2002, the plan participant generally would have had to pay the tax. Under the new law, the plan participant still must pay the tax if the distribution or payment is made to a child or other dependent. For more information about QDROs, see the discussion under General Information in Publication 575, Pension and Annuity Income.

When to include deferred amounts in income. Beginning in 2002, amounts in eligible state or local government section 457 plans are generally deferred from tax until paid to you. Before 2002, these amounts generally became subject to tax when either paid or otherwise made available to you.

Rollovers. For distributions made after 2001, eligible state or local government section 457 plans are qualified retirement plans for rollover purposes. You may be able to roll over certain distributions to and from these plans. For more information about rollovers to and from qualified retirement plans, see Rollovers in Publication 575.

Tax on early distributions. The tax on early distributions may apply to a distribution made after 2001 from an eligible state or local government section 457 plan to the extent it is attributable to amounts rolled into the plan from another type of qualified retirement plan. For more information about the tax on early distributions, see Tax on Early Distributions in Publication 575.

Changes to the coordination rules between 403(b) plans and 457 plans. Beginning in 2002, if you contribute to both a 403(b) plan and a 457 plan in the same year, you do not reduce the maximum deferral limit of the 457 plan by the amount of contributions made to your 403(b) account.

If you contribute to a 457 plan in 2002, see your plan administrator for contribution limits.

Excise Tax for Nondeductible (Excess) Contributions

For years beginning after 2001, when figuring the 10% excise tax, you can choose not to take into account as nondeductible contributions for any year contributions to a defined benefit plan that are not more than the full funding limit figured without considering the current liability limit.

Apply the overall limits on deductible contributions first to contributions to defined contribution plans and then to contributions to defined benefit plans. If you use this new exception, you cannot also use the exception under section 4972(c)(6) of the Internal Revenue Code.

Earned Income of Members of Recognized Religious Sects

For ment plans includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax.

Rollovers

Eligible rollover distribution. You may be able to roll over the nontaxable part of a retirement plan distribution such as your after-tax contributions) made after 2001 to another qualified retirement plan or traditional individual retirement account (IRA). The transfer must be made either through a direct rollover to a qualified plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to an IRA. For more information on eligible rollover distributions, see Rollovers in Publication 575, Pension and Annuity Income.

Hardship distributions not eligible for rollover. A hard-ship distribution made after 2001 from any retirement plan is not an eligible rollover distribution. For more information on eligible rollover distributions, see Rollovers in Publication 575, Pension and Annuity Income.

Time for making rollovers. You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer’s plan. However, the 60-day period may be extended for distributions made after 2001 in certain cases of casualty, disaster, or other events beyond your reasonable control. For more information about rollovers, see Publication 575, Pension and Annuity Income.

Rollovers by surviving spouses. For distributions after 2001, an employee’s surviving spouse who receives an eligible rollover distribution may roll it over into an eligible retirement plan, including an IRA, a qualified plan, a section 403(b) annuity, or a section 457 plan. A surviving spouse who received an eligible rollover distribution before 2002, could only roll it over into an IRA. For more information on rollovers, see Publication 575, Pension and Annuity Income.

Expanded written explanation to rollover distribution recipient. Before making an eligible rollover distribution, the administrator of a qualified retirement plan must provide you with a written explanation of various qualified retirement plan rollover rules. For most distributions made after 2001, the explanation must also tell you how the distribution rules of the plan you roll the distribution over to may differ from the rules that apply to the plan making the distribution in their restrictions and tax consequences. For more information about rollovers, see Publication 575, Pension and Annuity Income.

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