EGTRRA Boosts Traditional IRA Contributions
Fewer U.S. taxpayers contributed to traditional, deductible individual retirement accounts and Keogh accounts in 2002, but the taxpayers who did contribute to the accounts put in more money.
Craig Copeland, an analyst at the Employee Benefit Research Institute, Washington, has published a report that uses the 2002 contribution data to assess the early effects of the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 on retirement savings.
President Bush signed EGTRRA into law in June 2001. One section of the bill increased the regular traditional IRA contribution limit to $3,000 for 2002, from $2,000 in 2001. In some cases, taxpayers also can roll assets from other retirement plans into IRAs.
The regular Keogh contribution limit increased to $40,000, from $35,000, according to the text of EGTRRA.
Copeland looked at preliminary 2002 data from the Internal Revenue Service and found that, thanks to EGTRRA, deductions for IRA contributions increased 30%, to $9.6 billion, and deductions for contributions to Keogh plans increased 19%, to $16 billion.
But the number of individual filers who claimed deductions for IRA contributions fell 3.6%, to 3.3 million, and the number who reported deductible Keogh contributions fell 8.4%, to 1.2 million, Copeland says.
The average deduction increased 35% for IRAs, to $2,148, and 30% for Keogh plans, to $2,900.
The average 2001 deduction for IRAs was over $2,000 because some individual filers were members of households where both spouses claimed IRA deductions, according to IRS spokesman Tim Harms.
Competition from Roth IRAs and 2002 economic turbulence might distort the picture of U.S. retirement savings painted by the traditional IRA 2002 deduction data.
“But most people made their decisions about IRA contributions closer to April 15, 2003,” Copeland says, referring to the fact that taxpayers have until April 15 of a given year to decide what traditional IRA deduction to take for the previous year.
The 2002 IRA deduction figures show that there was considerable pent-up demand for a higher contribution limit, Copeland says.
Despite the cool 2002 economy, “there was still a significant increase in the number of people who took advantage of the higher limit,” Copeland says.
Copeland recommends that financial advisors encourage a greater number of consumers to save by helping clients analyze their retirement income and savings needs.
Survey results suggest that simply analyzing consumers retirement savings needs might persuade some to save more, Copeland says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.