Another significant part of the 2001 tax legislation offers greater retirement savings incentives, including increases in the contribution limits to individual retirement accounts (IRAs) and employer-sponsored retirement programs such as 401 (k) plans.

The new law largely incorporates another piece of legislation, called the "Comprehensive Retirement Security and Pension Reform Act of 2001." Here are some highlights.

Increases in IRA Contribution Limits. The legislation increases the contribution limits for IRAs and creates a new "catch-up" rule that raises the contribution limits for people aged 50 and above by an additional $500. The new contribution limits for traditional and Roth IRAs will be $3,000 in 2002 and will gradually increase to $5,000 in 2008, with indexing in $500 increments thereafter.

Increased Benefit and Contribution Limits for Qualified Retirement Plans. Effective for years beginning after 2001, the legislation:

• Increases the limit on annual compensation that may be taken into account for determining, among other things; contributions and benefits under a qualified plan, to $200,000 (from $170,000) , with indexing in $5,000 increments thereafter;

• Increases the limit on annual additions to a defined contribution plan to $40,000 (from $35,000), with indexing in $1,000 increments thereafter;

• Increases the limit on annual benefits that may be received under a defined benefit plan to $160,000 (from $140,000), with inflation adjustments thereafter in $5,000 increments, as under current law;

• Increases the dollar limit on elective deferrals under section 401 (k) plans tax -sheltered annuities ("section 403(b) annuities"), and salary reduction simplified employee pension plans ("SEPs") to $11,000 (from $10,500).. The limit is to increase in $1,000 increments in later years until it reaches $15,000 in 2006, with indexing in $500 increments thereafter;

• Increases the dollar limit on annual deferrals under "section 457 plans," i.e., deferred compensation plans of state or local governments or tax-exempt organizations, to $11,000 (from $8,500) .The limit is to increase in $1,000 increments in later years until it reaches $15,000 in 2006, with indexing in $500 increments thereafter;

• Increases the dollar limit on annual elective deferrals to a SIMPLE plan to $7,000 (from $6,500). The limit is to increase in $1,000 increments in later years until it reaches $10,000 in 2005, with indexing in $500 increments thereafter.

Plan Loans to Owners. The new law should benefit the owners of many closely held businesses by generally eliminating the special rules relating to plan loans to S corporation shareholders, partners, and sole proprietors, thus permitting such loans without automatically triggering a violation of the "prohibited transaction" rules.

Remember, further changes in the rules are almost a certainty.

"Sunset" in 2011? One final aspect of the legislation merits comment. Technically, the changes made by the new law will cease to apply after 2010! This highly unusual provision was included to insure technical compliance with the federal budget law. The lawmakers obviously assume that this provision will be eliminated in future legislation.