Important Changes for 2002

Increased traditional IRA contribution and deduction limit. The most that can be contributed to your traditional IRA for 2002 is the smaller of the following amounts:

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

If you are 50 years of age or older in 2002, the most that can be contributed to your traditional IRA for 2002 is the smaller of the following amounts:

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

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

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.

Modified AGI limit for traditional IRA contributions increased. For 2002, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (AGI) is between:

• $54,000 and $64,000 for a married couple or a qualifying widow(er) filing a joint return,
• $34,000 and $44,000 for a single individual or head of household, or
• $-0- and $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing a separate return, the upper and lower limits of the phaseout range increased by $1,000. See How Much Can I Deduct? under Traditional IRAs.

Credit for IRA contributions and salary reduction contributions. For tax years beginning after December 31, 2001, if you are an eligible individual, you may be able to claim a credit for a percentage of your qualified retirement savings contributions, such as contributions to your traditional or Roth IRA or salary reduction contributions to your SEP or SIMPLE. To be eligible, you must be at least 18 years old as of the end of the year, and you cannot be a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. Adjusted gross income is the amount from your Form 1040, line 33, or Form 1040A, line 19.

For more information, see Publication 553, Highlights of 2001 Tax Changes.

Rollovers from traditional IRAs into qualified plans. For distributions after December 31, 2001, you can roll over tax free a distribution from your IRA 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, see Rollovers in chapter 1.

Rollovers of distributions from employer plans. For distributions after December 31, 2001, you can roll over both the taxable and nontaxable part of a distribution from a qualified plan into a traditional IRA. If you have both deductible and nondeductible contributions in your IRA, you will have to keep track of your basis so you will be able to determine the taxable amount once distributions from the IRA begin.

For more information, see Rollover From Employer's Plan Into an IRA in chapter 1.

Rollovers of deferred compensation plans of state and local governments (section 457 plans) into traditional IRAs. Prior to 2002, you could not roll over tax free an eligible rollover distribution from a governmental deferred compensation plan to a traditional IRA.

Beginning with distributions after December 31, 2001, if you participate in an eligible deferred compensation plan of a state or local government, you may be able to roll over part of your account tax free into an eligible retirement plan such as a traditional IRA. The most that you can roll over is the amount that would be taxed if the rollover were not an eligible rollover distribution. You cannot roll over any part of the distribution that would not be taxable. The rollover may be either direct or indirect.

For more information, see Kinds of rollovers to an IRA in chapter 1.

Rollovers of traditional IRAs into deferred compensation plans of state and local governments (section 457 plans). Prior to 2002, you could not roll over tax free a distribution from a traditional IRA to a governmental deferred compensation plan.

Beginning with distributions after December 31, 2001, if you participate in an eligible deferred compensation plan of a state or local government, you may be able to roll over a distribution from your traditional IRA into a deferred compensation plan of a state or local government. Qualified plans may, but are not required to, accept such rollovers.

For more information, see Rollovers in chapter 1.

Rollovers of traditional IRAs into tax-sheltered annuities (section 403(b) plans). Prior to 2002, you could not roll over tax free a distribution from a traditional IRA into a tax-sheltered annuity.

Beginning with distributions after December 31, 2001, you may be able to roll over distributions tax free from a traditional IRA into a tax-sheltered annuity. You cannot roll over any amount that would not have been taxable.

Although a tax-sheltered annuity is allowed to accept such a rollover, it is not required to do so.

For more information, see Rollovers in chapter 1.

Participants born before 1936. If you were born before 1936, you may be able to use capital gain and averaging treatment on certain lump-sum distributions from qualified plans, but you will lose the opportunity to use capital gain or averaging treatment on distributions from a qualified plan if you roll over IRA contributions to that plan. You can retain such treatment if the rollover is from a conduit IRA. For more information on conduit IRAs, see IRA as a holding account (conduit IRA) for rollovers to other eligible plans in chapter 1.

No rollovers of hardship distributions into IRAs. For distributions made after December 31, 2001, no hardship distribution can be rolled over into an IRA. For more information about what can be rolled over, see Rollover From Employer's Plan Into an IRA in chapter 1.

Hardship 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 December 31, 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.

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 taxable compensation.

If you are 50 years of age 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 taxable compensation.

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

Contributions to both traditional and Roth IRAs for same year. 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 years of age 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 taxable compensation 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 AGI is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? in chapter 2.

Increase in limits on elective deferrals under a SEP-IRA. In general, the limit on elective deferrals made on your behalf for 2002 that represent a reduction in your salary under a SEP-IRA cannot be more than $11,000 (up from $10,500 for 2001). For more information, see What Is a Salary Reduction Arrangement? in chapter 3.

Increase in overall limits on SEP-IRA contributions. For 2002, your employer can contribute to your SEP-IRA up to the lesser of 15% of your compensation or $30,000 (up from $25,500 in 2001). For more information, see What Is a Salary Reduction Arrangement? in chapter 3.

Additional elective deferrals under a SEP-IRA for persons 50 and older. For contributions made after December 31, 2001, additional elective deferrals can be contributed to your salary reduction arrangement SEP-IRA if:

• You are 50 or older, and
• No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

For more information, see What Is a Salary Reduction Arrangement? in chapter 3.

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older. For contributions made after December 31, 2001, additional salary reduction contributions can be made to your SIMPLE IRA if:

• You are 50 or older, and
• No other salary reduction contributions can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

For more information, see How Much Can Be Contributed on My Behalf? in chapter 4.

Increase in limit on salary reduction contributions under a SIMPLE. For 2002, salary reduction contributions that your employer can make on your behalf under a SIMPLE plan are increased to $7,000 (up from $6,500 in 2001).

For more information about salary reduction contributions, see How Much Can Be Contributed on My Behalf? in chapter 4.

Rollovers from SIMPLE IRAs. For distributions after December 31, 2001, you may be able to roll over tax free a distribution from your SIMPLE IRA to a qualified plan, a tax-sheltered annuity (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Previously, tax-free rollovers were only allowed to other IRAs. For more information, see chapter 4.

Self-employment earnings for purposes of SIMPLEs. Beginning after 2001, for purposes of the limit on deductions for contributions to a self-employed person's SIMPLE IRA, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. For more information, see Self-employed individual compensation in chapter 4.

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