You get to save more in individual retirement accounts: $3,000 per person, a hefty 50 percent increase from $2,000, plus an extra $500 if you’re 50 or older. If you didn’t save last year’s tax rebate, start now with this year’s income-tax cuts. If you’re a married couple with two kids and earning $50,000 a year, you’ll get an additional $600 in 2002. But don’t chew it up on pizza–put that money to work in an IRA early in the year and you’ll reap the benefits of compound interest. Calculate this: if the two of you are 50 or older, save the maximum $7,000 every January for the next 20 years, and you’ll reap an extra $25,626 (assuming 8.25 percent) when you’re ready to retire. And if you’re on the lower end of the income scale (singles earning less than $25,000, heads of households, $37,500, and couples, $50,000), there’s a new tax provision offering a tax credit from 10 to 50 percent of your contributions to your IRA or other retirement account.
Maximum allowable contributions to Coverdell education savings accounts (ESAs) rise from $500 a year to $2,000, and you can now make tax-free withdrawals for K-12 students. This year also, qualified withdrawals from the state-run college savings programs known as 529 Plans are tax-free to beneficiaries. But note: you can withdraw from an ESA or 529 Plan in the same year that you claim a Hope or Lifetime Learning credit, but not to pay for the same education expenses of the same student. Example: pay for the first $2,000 of a child’s tuition bill with a Hope credit, which leaves $8,000 you can take tax-free from a 529 or ESA. For more, go to the Web site savingforcollege.com.
This year the top estate-tax rate drops to 50 percent, and the amount that can be inherited tax-free rises to $1 million from $675,000. Limits on tax-free gifts go up, too, to $1 million. But the new law is fickle. For example, inherited capital gains that are not taxed now will be taxable in 2010–even if no estate tax is owed. Good strategies now: divide your IRA among children or grandchildren, spell it out in your IRA’s plan documents or will, and review when there is a change of beneficiary; name a contingent beneficiary should your primary beneficiary, such as a spouse, choose to decline his inheritance for tax reasons; and, to cover future taxes, hold a term-life policy convertible to a cash-value policy. And always keep good records.
