Saving for a Rainy Day

IRA Contributions

Annual maximum contributions to traditional and Roth IRA's were increased from $2,000 to:

Year	Contribution Limit
2002-2004:	$3,000
2005-2007:	$4,000
2008:	$5,000
Thereafter increased in $500 increments for adjustments for inflation.

And, for taxpayers age 50 and older, there are additional 'catch-up contributions' allowed:
2002-2005: An additional $500; thereafter $1,000 additional allowed.

More incentive to save: A credit as well.

Saver's Credit is now permanent!

For the years 2002-2006, there will be a credit for IRA contributions (both traditional and Roth), and for elective deferrals / after-tax contributions to employer retirement plans (401(k), 403(b), 457, SIMPLE, salary reduction SEP).

You could get a double benefit: excluding income from tax with the contribution (except for Roth and nondeductible amounts to a traditional IRA), and then getting a credit against your taxes, up to $2,000 of the contribution amount. The credit is nonrefundable, which means if your tax is reduced to zero, you can't take the rest of the credit with you.

Of course we're dealing with tax laws, so there are percentage tables being created like rabbits on Viagra. During shore leave. On a Friday night. Without cable TV.

The credit will be 10%, 20% or 50% based on filing status and adjusted gross income. MFJ with adjusted gross income over $50,000 won't get the credit; neither will Head of Household over $37,500 nor Single / MFS over $25,000.

Simple enough for you? ... okay, to keep tax preparers in business, other restrictions are that you have to be between the ages of 18 and 59, not a full-time student, and not claimed as a dependent by someone else. And that the amount eligible for credit will be reduced by any distributions from a retirement plan anytime two years previous to the year claiming the credit. So there.

What it means: You can put more money into an IRA each year (lowering your taxable income if it's a deductible IRA). And at lower/moderate income levels, you can also get a credit against your taxes for IRA contributions and deferrals at work.

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Employer-Provided Plan Contributions