Once again, the House has passed a bill increasing the amount you can contribute to IRAs and other retirement plans such as 401(k)s. Similar bills have died at the end of recent Senate terms, but the odds favor passage this year. If you favor this legislation, why not get your Senator on the horn?

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By Tom Jacobs (TMF Tom9)
May 3, 2001

The House has passed legislation to allow individuals to contribute more to IRAs and 401(k) and related plans. Sponsored by Reps. Rob Portman (R-OH) and Ben Cardin (D-MD), the bill is intended to increase personal savings and encourage companies to offer traditional pensions.

The main provisions of the bill are:

• Increase the traditional and Roth IRA individual limits from $2,000 to $5,000 per year, phased in between now and 2004. Those 50 and older wouldn't have to wait and could save $5,000 annually starting in 2002.
• Increase employee contribution limits for 401(k), 403(b), 457,and SIMPLE plans. The current 401(k) and 403(b) $10,500 limits increase to $15,000 annually by 2006. Rep. Portman's website maintains a helpful chart with the specific details on all the plans.
• Change rules to encourage small businesses to offer traditional defined benefit pension plans, which numbered 114,000 in 1987 but now comprise just 39,000.  

Contribution limits haven't changed since the 1980s, and the $2,000 limit for IRAs is stuck at 1981 levels. The bill does not change income limits on those who can contribute. Its provisions are estimated to cost $52 billion in lost Federal tax income over 10 years.

To become law, the bill must pass the Senate, where similar bills have died in past years. Sen. Pete Domenici (R-NM), chairman of the Senate's budget committee, told The New York Times that he predicts that the bill could probably pass the Senate before the end of the year.

If and when the increases take effect, Foolish investors should take advantage and contribute more to plans. Generally, we advise contributing to a 401(k) or other employer plan the maximum that an employer matches: If an employer matches your contribution by paying 50 cents for each dollar you contribute up to 10% of your salary -- but allows you to contribute 20% of your salary -- we recommend that you make that 10% contribution and make any additional contributions to an IRA.

On the other hand, if your employer does not offer a 401(k) match, it may be advisable to make IRA contributions the higher priority. (To learn more about how to plan for your retirement, take our self-paced Roadmap to Retirement Online Seminar! Also be sure to check out our extensive online Retirement area.)

If you favor this legislation, please let your Senator know!

Tom Jacobs, Tom Jacobs, Tom Jacobs performance fleece. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

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