Important Changes for 2002

Increased traditional IRA contribution and deduction limit. Unless you reached age 50 before 2003, 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 reached age 50 before 2003, 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 for 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 filing a joint return or a qualifying widow(er) ,
• $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 separately, the upper and lower limits of the phaseout range increased by $1,000. See How Much Can I Deduct? in chapter 1. Credit for IRA contributions and salary reduction contributions. For tax years beginning after 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.

For more information, see chapter 5.

Rollovers of distributions from employer plans. For distributions after 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 under Can I Move Retirement Plan Assets? in chapter 1.

Kinds of rollovers from a traditional IRA. For distributions after 2001, you can roll over, tax free, a distribution from your traditional IRA into a qualified plan, including a deferred compensation plan of a state or local government (section 457 plan), and a tax-sheltered annuity (section 403(b) 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. For more information, see Rollovers under Can I Move Retirement Plan Assets? 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 2001, if you participate in an eligible deferred compensation plan of a state or local government, you may be able to roll over part or all 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 qualifies as an eligible rollover distribution. The rollover may be either direct or indirect.

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 under Rollover from Employer's Plan Into an IRA in chapter 1.

No rollovers of hardship distributions into IRAs. For distributions made after 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 under Can I Move Retirement Plan Assets? 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 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 about the 60-day rule, see Time Limit for Making a Rollover Contribution under Can I Move Retirement Plan Assets? 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? under Can I Contribute to a Roth IRA? 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? under Can I Contribute to a Roth IRA? 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 25% of your compensation or $40,000 (up from $30,000 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 2001, additional elective deferrals can be contributed to your salary reduction arrangement SEP-IRA if:

• You reached age 50 by the end of 2002, 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 on elective deferrals, 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 2001, additional salary reduction contributions can be made to your SIMPLE IRA if:

• You reached age 50 by the end of 2002, 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 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 When Can I Withdraw or Use Assets? in 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 about a self-employed individual's compensation for purposes of a SIMPLE plan, see Self-employed individual compensation under What Is a SIMPLE plan? in chapter 4.

Change in exception to the age 59 1/2 rule. Generally, if you are under age 59 1/2, you must pay a 10% additional tax on the distribution of any assets from your traditional IRA. However, if you receive distributions as part of a series of substantially equal payments over your life (or life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, you do not have to pay this additional tax even if you receive distributions before you reach age 59 1/2. If these payments are changed (for any reason other than death or disability) before the later of the date you reach age 59 1/2 or 5 years after the first payment, you generally are subject to the 10% additional tax. You must pay the full amount of the additional tax that would have been due if your payments had not been substantially equal periodic payments. You must also pay interest. If your series of substantially equal periodic payments began before 2003, you can change your method of figuring your payment to the required minimum distribution method at any time without incurring the additional tax. For distributions beginning in 2002, and for any series of payments beginning after 2002, if you began receiving distributions using either the amortization method or the annuity factor method, you can make a one-time switch to the required minimum distribution method without incurring the additional tax. For more information, see Annuity under Age 591/2 Rule in chapter 1. Rules for figuring your required minimum distribution are explained under Minimum Distributions in chapter 1.

Important Changes for 2003

Modified AGI limit for traditional IRAs. For 2003, 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:

• $60,000 and $70,000 for a married couple filing a joint return or a qualifying widow(er),
• $40,000 and $50,000 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 separately, the upper and lower limits of the phaseout range increase by $6,000. For more information, see How Much Can I Deduct? in chapter 1. Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will only be subject to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA.

For this purpose, a qualified employer plan includes:

• A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),
• A qualified employee annuity plan (section 403(a) plan),
• A tax-sheltered annuity plan (section 403(b) plan), and
• A deferred compensation plan (section 457(b) plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Increase in limits on elective deferrals under a SEP-IRA. In general, the limit on elective deferrals made on your behalf for 2003 that represent a reduction in your salary under a SEP-IRA cannot be more than $12,000 (up from $11,000 for 2002). 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 2003, additional elective deferrals can be contributed to your salary reduction arrangement SEP-IRA if:

• You will be 50 or older in 2003, 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 2003, the additional amount is the lesser of the following two amounts.

1. $2,000 (up from $1,000 for 2002), or
2. Your compensation for the year reduced by your other elective deferrals for the year.

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

Increase in limit on salary reduction contributions under a SIMPLE. For 2003, salary reduction contributions that your employer can make on your behalf under a SIMPLE plan are increased to $8,000 (up from $7,000 in 2002).

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

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older. For 2003, additional salary reduction contributions can be made to your SIMPLE IRA if:

• You will be 50 or older in 2003, 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 2003, the amount is the lesser of the following two amounts.

1. $1,000 (up from $500 for 2002), or
2. Your compensation for the year reduced by your other elective deferrals for the year.

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

Simplified rules for required minimum distributions. There are new rules for determining the amount of a required minimum distribution for a year beginning after 2002. The new rules, including new life expectancy tables, have been incorporated into chapter 1 and appendix C. You can determine the amount of a required minimum distribution for 2002 using either the rules in this edition of the publication or the rules in the edition for use in preparing 2001 returns. The rules are explained at When Must I Withdraw IRA Assets? (Required Distributions) in chapter 1 of both editions of the publication.

Switch from election to take balance by the end of the fifth year. A designated beneficiary who has elected to take the entire balance in the account by the end of the fifth year following the year of the owner's death may be able to switch to receiving the balance over the beneficiary's life expectancy. For more information, see Switch from election to take balance by the end of the fifth year under Figuring the Required Minimum Distribution in chapter 1.

Statement of required minimum distribution. If a minimum distribution is required from your IRA for 2003, the trustee, custodian, or issuer that held the IRA at the end of 2002 must either report the amount of the required minimum distribution to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31, 2003. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died.

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