Senior Legal Issues


Retirement Savings Provisions                          

This law largely incorporated 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 increased the contribution limits for IRAs and creates a new “catch-up” rule-        

• Raised the contribution limits for people aged 50 and above by an additional $500 through 2005. 
• Increasing in $1,000 annual increments per year for 2006 and later years.         

•The new contribution limits for traditional and Roth IRAs will be:

Ø  $4,000 for 2005 through 2007          

Ø  $5,000 in 2008      

• Thereafter the limit will be indexed for inflation in $500 increments.  

Increased Benefit and Contribution Limits for Qualified Retirement Plans             

Effective for years beginning after 2001, the legislation:             

• Annual Compensation      

Increased 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 (with indexing for inflation in increments of not less than $5,000 thereafter). The current compensation limit is $210,000.         

• Annual Additions to Defined Contribution Plans

Increased the limit on annual additions to a defined contribution plan to the lesser of 100% of compensation or $40,000, with indexing for inflation in $1,000 increments thereafter. For 2005, the limit on annual additions equals $42,000. Annual additions are the sum of employer contributions, employee contributions and forfeitures with respect to an individual under all defined contribution plans of the same employer.     

• Annual Benefits Under Defined Benefit Plans    

Increased the limit on annual benefits that may be received under a defined benefit plan to the lesser of 100% of average compensation on the last 3 years or $170,000 (2005), with inflation adjustments thereafter in $5,000 increments. The dollar limit is reduced for benefit commencement before age 62 and increased for benefit commencement after age 65.            

• 401(k), 403(b), SEP Elective Referrals           

Increased the dollar limit on elective deferrals under section 401(k) plans, tax sheltered annuities ("section 403(b) annuities"), and salary deduction simplified employee pension plans ("SEPs") to $11,000. 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. For 2005, the limit is $14,000.    

• 457 Elective Deferrals      

Increased 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. The limit is to increase in $1000 increments in later years until it reaches $15,000 in 2006, with indexing in $500 increments thereafter. For 2005, the limit is $14,000.    

• SIMPLE Election Referral                 

Increased the dollar limit on annual elective deferrals to a SIMPLE plan. A SIMPLE plan, a Savings Incentive Match Plan for Employees, is a simplified retirement plan available to certain employers with 100 or fewer employees. The limit is $10,000 in 2005, with indexing in $500 increments thereafter.     

• Catch-Up Contributions

Ø  Allows individuals 50 and older to make "catch up" contributions to 401 (k), SEP, 403(b) and 457 plans.          

Ø  Increasing by $1,000 per year to $4,000 in 2005 and $5,000 in 2006      

Ø  With indexing in $500 increments thereafter.               

Ø  The catch-up contribution for SIMPLE plans is 50% of the limit for 401 (k),SEPs and 457 plans.         

Plan Loans to Owners:

This law should 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.

Federal Estate Tax Repeal:

The legislation technically repealed the federal estate taxes but provided a decade-long phase-in period, several changes to the current rules in the interim, and a "carryover basis" provision that is sure to cause confusion and potentially unpleasant income tax consequences to the beneficiaries of many estates. Moreover, further changes in the rules are almost a certainty.

Here are a few key points to keep in mind:

Ø      The repeal also applies to the generation-skipping taxes.
Ø      The federal estate and generation-skipping taxes are on a phase out plan with tax repeal slated for 2010.
Ø       Estate /  inheritance tax repeal may eliminate the income tax savings achieved through a "step-up" in the basis of property received from a decedent. As a result, families may not be able to take advantage of the  potential  benefits of estate tax repeal without careful planning.
Ø      Starting in 2010, when the federal estate tax is completely eliminated, the step-up in basis in estates will be limited to a maximum of $1.3 million step-up on top of theestate's original basis when passing to a non-spouse, and $3 million when passingto a surviving spouse. Prior to 2010, an estate has an unlimited step-up in basis.

Many Americans' estates consist of their primary asset, their home. The amount of an estate that is excluded from Federal Estate Tax changes over the next six years is detailed in the chart below:













Estate Tax eliminated


State versus Federal

Most states have effectively eliminated state estate taxes. Check your state laws to determine if estate, death, or inheritance (paid by the recipient) taxes apply.

Gift Tax

  • The gift tax exemption is $1,000,000, with the tax rate decreasing on an incremental basis to 35% for 2010 and years thereafter.

    The annual gift tax exclusion law remains unchanged.

    An individual can make a gift to any other individual, free of gift taxes or gift tax reporting, of $11 ,000 in 2005. This amount may be increased in later years due to a cost-of-Iiving adjustment.

    Spouses can each give a gift of $11,000 to the same person, making a total tax-free gift of $22,000.

Capital Gains- Tax Issues

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum rate on the net capital gains rate of an individual (net long-term capital gains less net short-term capital losses) to 15 percent. Net capital gains previously taxed at 10 percent will be taxed at 5 percent.

In 2008, the capital gain rate for gain taxed at 5% will be reduced to zero. As before, in order to qualify for long-term capital gains treatment, property must be held for more than 12 months. There are special transitional taxation rules that an accountant can detail for you.


Finally, unless Congress extends them, the capital gains rate reductions will sunset December 31,2008, at which time the rates will revert to 20 percent and 10 percent.         


Disclaimer: SAREC® members are not qualified to give legal or tax advice and SAREC does not guarantee the accuracy of its member’s information.  All clients are strongly urged to contact a Real Estate Attorney, CPA, or other financial specialist to obtain legal or tax advice prior to completing any contracts.  Make financial review a contingency of your transaction.

2002 ©AII Rights Reserved; Revised February, 2005