For years, the maximum contributions to Individual Retirement Accounts (IRA’s ) and Roth IRAs stood at $2,000 per year. That’s the figure upon which many investors based their plans and, in fact, many have set up convenient automatic monthly contributions based on that annual figure. This year, that has changes.

Maximum contribution increased

The new tax legislation enacted in 2001 included extensive changes to the rules relating to IRAs, Roth IRAs and pension plans. Primarily, the changes are designed to allow individuals to save more for retirement through tax-advantages plans and to increase pension plan coverage. For IRA account holders, the bottom line is that maximum annual contributions have increased to $3,000 per year (or 100 percent of your earned income, whichever is less).

Financial advisors say this has the potential to positively impact what individuals can expect to save for retirement, especially because the earnings growth over time is tax-deferred until withdrawn. For those investors who are used to contributing $166.67 per month ($2,000 annually), it is important to realize that you can increase your monthly contributions now to $250 per month. It might feel like an added expense now, but, as most financial experts agree, it could pay off in increased assets for your retirement.

Catch up provisions

For those IRA account holders that are age 50 or over, new “catch-up” provisions have been added. This means that, if you are 50 or older, you can add and additional $500 to your annual contribution. If you have set up automatic bank draft contributions and desire to maximize your tax-year 2002 contributions with the catch-up, the monthly draft would become $291.67.

As with past years, you have until April 15 of each year to contribute to an IRA for the previous year. Remember, however, that they new legislation didn’t take effect until 2002, so for the 2001 tax year, your maximum contribution is $2,000, going forward it becomes $3,000.

The legislation provides that the contribution maximums increase again in 2005 ($4,000 annually) and in 2008 ($5,000 annually). Things can change in 2010 when the laws are set to expire, unless re-enacted by Congress. Stay in touch with your financial advisor, your accountant and tax advisor to ensure that you remain informed about future changes. Meantime, don’t hesitate to take advantage of the new contribution maximums. Chances are, at retirement, you’ll be happy that you did.

Amounts withdrawn from an IRA generally are taxable in the year of withdrawal and may be subject to a 10 percent penalty if withdrawn prior to age 59 1/2. An automatic investment plan does not assure a profit and does not protect against loss in declining markets.