The Economic Growth and Tax Relief Reconciliation Act of 2001 encompasses a wide range of changes which benefit taxpayers of all ages and income brackets. Some of the greatest opportunities created by the law are in three major areas of personal finance: retirement saving, college funding and estate planning.

Retirement saving

Both individual and employer-sponsored retirement saving plans got a boost with the new law. Beginning in 2002, the contribution limit for Individual Retirement Accounts, both traditional and Roth IRAs, increases to $3,000 a year, up from the current $2,000 annual limit. After that, the limit will move up in phases until it reaches $5,000 a year in 2008. Individuals age 50 and over will be eligible to make additional ”catch-up” IRA contributions of up to $500 in 2002 through 2005. The catch-up contribution limit will increase to $1,000 for 2006 and later years.

Participants in certain defined contribution retirement plans, such as 401(k) plans and 403(b) plans, will have increased salary deferral limits. Beginning in 2002, they may contribute up to $11,000 of their salary in 2002, an increase from $10,500 this year. The contribution limit is scheduled to rise annually in $1,000 increments to $15,000 in 2006.

The annual elective salary deferral limit for Savings Incentive Match Plan for Employees (SIMPLE) plans, available to companies of 100 or fewer workers, will rise to $7,000 next year, up from $6,500 this year. By 2005, that amount is slated to rise to $10,000.

Participants age 50 or over will have the opportunity to use a ”catch-up” provision that may allow them to contribute an additional amount above the annual deferral limit. Eligible participants in 401(k) plans may be able to make catch-up contributions of $1,000 next year, an amount that increases in increments of $1,000 a year, to $5,000 in 2006. SIMPLE plan participants in this age group may be able to make catch-up contributions of $500, a limit that increases in increments of $500 a year to $2,500 by the year 2006.

College saving

With the new law, two popular college-saving vehicles — state-sponsored 529 plans and Coverdell Education Savings Accounts (formerly known as Education IRAs) — become even more valuable funding avenues.

State-sponsored 529 college savings plans allow parents, grandparents and others to contribute to an account that can be used to pay a child’s college tuition and room and board, as well as other expenses.

Previously, the assets in the plan could grow tax-deferred, but were generally taxed at the child’s rate when withdrawn for qualified higher education expenses. Starting in 2002, gains will be tax-free when withdrawn for qualified expenses. People saving through 529 plans can use the assets for private colleges and universities, as well as public institutions, and graduate and post-graduate schools, such as medical schools.

Also starting in 2002, for taxpayers who qualify, the annual non-deductible contribution limit to Coverdell Education Savings Accounts was increased to $2,000 a year per designated beneficiary, up from the current $500 annual limit. The assets can grow tax-deferred and be withdrawn tax free if used for qualified higher education expenses. The new law allows assets to be used for qualified elementary and secondary education expenses, including tuition for private and parochial schools.

Estate planning

The new law repeals the estate tax in 2010. In the interim, it increases the credit that allows taxpayers to exempt a portion of their assets from estate taxes. In 2001, up to $675,000 of assets qualify for the unified credit.

Beginning in 2002, the estate tax exemption will be raised to $1 million and then gradually rise to $3.5 million in 2009. In 2002, the highest estate and gift tax rates will be reduced from 55 percent to 50 percent and will then gradually drop to 45 percent in 2007. Unless the repeal is extended, in 2011 the estate tax exemption is scheduled to roll back to $1 million, the top estate and gift tax rate is slated to return to 55 percent.

Plan new strategies

As we near the end of the year, you should consider reviewing the new tax law and its implications for your retirement saving, college funding and estate planning strategies. The current market environment coupled with the recent tax law changes represents the perfect time to revisit your personal financial plan.