Dear Readers;

As I'm sure you've heard by now, Congress just passed one of the most sweeping tax reform measures in history: "The Economic Growth & Tax Relief Reconciliation Act of 2001." I feel a little weird describing something that's 180 pages long and full of technical legalese as "exciting," but, honestly, when you consider the ramifications, it is.

 

Most of the buzz about this bill has centered on the reduction in income tax rates. This will be phased in gradually over the next 5 years. However, what's equally significant are the changes being made to retirement plans and other saving vehicles, such as college "529 plans."

Words like "revolutionize" and "empower" come to mind. Trust me: this legislation will have a tremendous impact on your ability to save and invest if you take advantage of the tax breaks it offers. Keep in mind that most of these provisions take effect starting January 2002.

— Higher Limits for IRAs:

Starting next year, the maximum contribution rises to $3,000. It hits $4,000 in 2005 and tops out at $5,000 in 2008. After that, the annual contribution limit will be increased in $500 increments based on inflation.

(It's not as if Congress is giving away the farm on this one. Keep in mind we've been stuck with a limit of $2,000 since 1981. Adjust that for inflation over the past 20 years and-- ta-da!-- you get $5,000. But, hey, I'll take it.)

These new contribution limits are for both traditional IRAs and Roths. So depending upon the IRA you choose, if you meet the income limits (which have not changed) you will either get a tax deduction and tax-deferred accumulation of your money or totally tax-free accumulation of your money.

Shame on you if you can afford it and don't take advantage of this opportunity.

But wait! There's more: The bill includes a "catch-up" provision for anyone age 50 or older. This is designed to help those who might not be covered by a company retirement plan or who left the official workforce for awhile and thus, missed out on years of tax-favored saving, such as women.

In addition to the increased contributions outlined above, the over-50 set can add even more to their IRA: an extra $500 in 2002 and $1,000 more starting in 2006. In other words, if you are 50 years or older, in 2002 your maximum IRA contribution will be $3,500. By 2008 it will rise to $6,000!

— Higher Limits for Company Plans:

The maximum you can contribute to your company retirement plan jumps from $10,500 to $11,000 in 2002 - almost a 5% increase. It keeps climbing in $1,000 increments until it hits $15,000 in 2006. After that, it's increased based on inflation.

There are "catch-up" provisions for company plans similar to those for IRAs, so older workers can sock away even more. And there's something for everyone on the economic spectrum: for upper income workers, the amount of salary that your contribution is based on is increasing- from $170,000 to $200,000.

Lower income workers ($25,000 single/$50,000 joint) under age 60 who put up to $2,000 to their company retirement plan will be eligible for a tax credit (much more valuable than a deduction) of up to 50% of their contribution. The amount depends upon your Adjusted Gross Income and filing status (married or single). The result is some folks are going to be able to contribute $2,000 to their company plan and subtract $1,000 from their tax bill.

— Retirement Plan "Portability":

When it comes to your company retirement plan, you can take it with you. Used to be if you were covered by a 401(k) plan at your old company, but your new employer had a 403(b) plan you had to keep the accounts totally separate. No more. You'll be allowed to roll balances from one retirement plan into another, even if they aren't the same type of plan.

This includes 457 plans and profit-sharing plans. This will make record-keeping a whole lot easier. Instead of trying to keep track of all the investments in different plans, you can consolidate them. It will also make it simpler to manage your asset allocation.  

— Education Tax Breaks

What's the biggest gripe people have about the Education IRA? You're limited to just $500 a year per child. Well, Congress finally got the message. Starting next year, you can put as much as $2,000 annually into an Education IRA. And you no longer have to use the money only for college: they extended the use to include private elementary and secondary schooling. One thing is still the same: provided the money is used as the law intends, any growth is tax-free. The income limits on who is eligible to contribute have been increased.

Speaking of saving for college, I've written enthusiastically about 529 Plans in several columns. They're about to get a whole lot better: Starting next year, like the Education IRA, provided the money is used for "qualified education expenses," distributions from 529 plans are also tax-free. (They're currently taxed at the student's bracket.) 529 College Savings Plans allow you to set aside well over $100,000 (and in several cases, more than $200,000) to pay for college. Like the Education IRA, you can change the beneficiary.

However, in addition to the higher contribution amounts, 529s have some other advantages: there is no income limit on the donor (Bill Gates can open one of these for each of his kids), there's no time limit on when the money has to be used and you can contribute up to $50,000 in a single year without triggering the gift tax (applied in all other cases on gifts in excess of $10,000).

And you'll finally be able shift the beneficiary to Cousin Shirley, or Cousin Percy or your Kissin' Cousin! Because of some quirk in the original legislation, you could change the beneficiary of a 529 plan to any other family member of the beneficiary except a cousin. Congress has apparently decided that first cousins now qualify as "family." (Of course, you are free to make your own decision!)

Another piece of good news for parents sweating out college bills: withdrawals from an Education IRA or 529 plan will still be tax-free, even if you claim the Hope or Lifetime Learning Tax credit (provided the credit and the withdrawal are not for the same expenses.)

Finally, if you're out of school and struggling with student loans, Congress is raising the income limit on who is eligible to deduct the interest on these loans: single taxpayers with AGI of less than $50,000 can deduct the full amount; you can deduct a portion of the interest until your income hits $65,000, then you lose the deduction entirely. For married taxpayers the income limit for the full deduction is $100,000, with the phaseout coming at $130,000. And you no longer get this tax break for only a limited number of months after graduation. You can deduct the interest as long as it takes to pay off your loans.

I've just scratched the surface of this bill. As I said, most of the benefits start next year. But a few take effect as of July first of this year: the lowest income tax bracket drops from 15% to 10%. This means, if you're single, instead of owing $900 on your first $6,000 income, you'll owe $600. For couples, the amounts double: instead of $1800, the tax on your first $12,000 in income drops to $1200. That's why single filers will be getting checks for $300 in the fall and couples will receive one for $600.

The other tax brackets also decline, with each going down by one percent. The 28% bracket drops to 27%, 31% drops to 30%, etc.

And parents who qualify will receive an increase in the child credit, from $500 to $600.

This is all very positive because it puts money back into the hands of the people who earned it and gives us more control over what we do — or don't do — to prepare for the future. As I read and digest more of this bill, I'll be letting you know about additional tax breaks. So stay tuned!

— Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.