Fortify Your Nest Egg!

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By Robert Brokamp (TMF Bro)
May 22, 2002

We all know that Social Security is on shaky ground. And Americans, as a whole, aren't saving enough. In other words, the retirement prospects for a lot of people are looking pretty grim.

Perhaps that's why, as part of last year's new tax laws, Uncle Sam decided to increase the contribution limits to Individual Retirement Arrangements (IRAs) and employer-sponsored retirement plans. Starting this year, you can sock away more money in tax-advantaged accounts, and maybe reduce your taxable income too. Here are the details:

  • IRAs: The contribution limits have increased to $3,000 per year for traditional and Roth IRAs. The limits will increase to $4,000 in 2005, and $5,000 in 2008.
  • 401(k), 403(b), and 457 plans: The limits will increase to $11,000 for 2002, and will increase $1,000 each year until they reach $15,000 in 2006.
  • Catch-up contributions: If you're 50 years old or older, you can make an additional $500 contribution to your IRA and an extra $1,000 to your plan at work.

Is putting away an extra thousand or two such a big deal? It sure is. For example, using the previous Roth IRA limit of $2,000 a year (or $167 per month), a person would have $144,562 after 20 years (assuming an annual return of 11% -- the historical average for stocks). However, if that person increases her annual contribution to the new limit -- $3,000 a year, or $250 a month -- she would have $216,410 in 20 years. That's a $71,848 difference!

Now is the time to adjust your retirement plans:

  • If you have money automatically transferred to a retirement account, increase the amount of your contributions.
  • If you need to open an IRA, consult our 60-second guide on how to do just that.
  • If you aren't sure your retirement plan is on track, consider enrolling in our Roadmap to Retirement online seminar (for the younger crowd) or our Rule Your Retirement online seminar (for those near or in retirement). If you're interested in the latter, enroll today -- class begins tomorrow!

Following Uncle Sam's lead, Robert Brokamp has also raised his contribution limits. In fact, you can give him as much money as you want. The Motley Fool is investors writing for investors.