Columns:: New retirement plan possibilities result from new tax law

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Columns::September 17, 2001

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Campus News

New retirement plan possibilities result from new tax law

By Larry B. Dendy
ldendy@uga.edu

The federal tax law passed by congress earlier this year gives university employees several new opportunities to bolster their

retirement plans, increase savings and reduce the taxes they pay.
David Williamson, director of employee benefits in Human Resources, says the law changes many of the rules associated with tax-deferred supplemental retirement plans. The law provides new ways for employees to lower taxable income through higher contributions to retirement savings accounts, relaxes some restrictions on IRA rollovers, and makes more employees eligible to receive tax credits for contributing to retirement savings.
“The law has a large number of provisions that potentially can benefit most university faculty and staff members, regardless of classification, seniority or income level,” Williamson says. “It enables employees to put more money into supplemental pre-tax retirement plans, and provides an important tax break for employees at certain income levels.
“Many of these provisions aren’t as well known as the high-profile features of the law, such as tax rebates and tax cuts, but in the long run they are just as important, if not more so.”
Williamson says Human Resources will soon distribute detailed information to all employees about the provisions, most of which go into effect Jan. 1, 2002. The information is also on the Human Resources Web site at www.busfin.uga.edu/human_resources.
Here are some of the important changes:
• Williamson says provisions in the new law make it attractive for UGA to offer the 457 (b) tax-deferred savings plan as a supplemental retirement plan. The 457 (b) plan will be available in addition to the 403 (b) and 401 (a) (regular retirement) plans that are now offered.
Under the 457 (b) plan, employees can shelter up to $11,000 during 2002, and the limit will rise by $1,000 annually to a maximum of $15,000 in 2006. The dollar limit will not be reduced by contributions to the 403 (b) plan, meaning that the maximum contribution in both plans can be as high as $22,000.
For people aged 50 or older, catch-up contributions to both the 457 (b) and 403 (b) plans will be $1,000 in 2002, and will increase by $1,000 annually until 2006. After that, contributions will be indexed in $500 increments.
• The limit for annual contributions to 403 (b) supplemental retirement plans will rise from the current $10,500 to $11,000 in 2002. The limit will increase by $1,000 each year to a maximum of $15,000 in 2006. The new tax law also eliminates the maximum exclusion-allowance formula previously used to calculate maximum contributions to 403 (b) plans.
• The new law allows more flexibility in rollovers in employer-sponsored savings plans. The law now permits rollovers between 457 (b) plans, IRAs, 403 (b) and 401 (k) plans.
After-tax employee contributions can also be rolled over to an IRA. Previously these contributions were limited to 403 (b) and 401 (k) plans.
Williamson says these rollover changes should be especially helpful to employees in consolidating their retirement savings.
• Employees who are under the Teachers Retirement System will be able to purchase service credit time in the system with money from some 403 (b) or 457 (b) plans. Previously, such purchases could only be made with funds in a 401 (a) plan--which was essentially not an option since 401 (a) funds are only available when an employee quits.
• Employees at certain income levels will be able to take a non-refundable tax credit that will lower their overall total taxable income. The credit will be available to people who contribute to eligible retirement savings plans, such as 403 (b), 457 (b) and IRAs, and will apply to the first $2,000 in savings contributions.
The credit will be based on adjusted gross income as reported on tax returns. It will vary according to taxpayer category (individual, head of household, joint filer) and will be calculated on percentage of adjusted gross incomes ranging from under $15,000 to a maximum of $50,000.
• The salary limit for the 401 (a) plan as it relates to the Teachers Retirement System and Optional Retirement Program will be raised. This year, the salary amount that could be used to determine benefits under TRS and ORP was capped at $170,000. On Jan. 1, it will rise to $200,000 and will increase by an additional $5,000 every year. This means employer contributions to these retirement plans will automatically increase for people earning more than $170,000.
Williamson says the tax law contains a number of other changes relating to IRAs, including an increase in the elective deferral limit, relaxed rules governing catch-up for people older than 50 and increases in allowable contributions to education IRAs.

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