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Tax Relief for Californians

Legislature: Bills will bring state laws on retirement-account contributions into line with federal changes.


California residents, so far locked out of the increased retirement and tuition savings opportunities afforded by last summer's federal tax law changes, should get relief soon, state officials said.

Three bills to bring state laws into conformity with the federal changes are expected to become law by next month. The changes would be retroactive to Jan. 1.

A sweeping revision of federal tax laws last summer raised the limits for contributions to individual retirement accounts, education IRAs and 401(k), 403(b) and 457 savings plans starting this year. But California laws didn't automatically conform with the federal changes, leaving state residents at risk of breaking the law if they raised their savings contributions.

The state didn't rush to conform to the federal changes because of the cost: The higher savings limits for the tax-sheltered accounts will mean about $44 million in lost state tax revenue, at a time when California is facing a $12-billion budget deficit.

Nonetheless, "Californians should have the same tax-deferred retirement savings opportunities that most American workers already have," said state Sen. Jack Scott (D-Burbank), who sponsored one of three conformity bills. "It would be wrong for the state to deny them until next year or beyond."

The federal changes boosted annual IRA contribution limits to $3,000 from $2,000 and raised maximum annual contributions to 401(k), 403(b) and 457 retirement savings plans to $11,000 this year, increasing by $1,000 a year thereafter to $15,000 by 2006.

Also, the maximum annual contribution to education IRAs was raised to $2,000 from $500.

Two of the conformity bills--one in the Senate, the other in the Assembly--would raise savings limits for Californians to match the federal changes.

The bills are expected to pass this week, then go to Gov. Gray Davis, who is favorably disposed to sign them, spokesman Russ Lopez said.

The Legislature already has delivered one conformity bill to Davis. The change in the law would remove certain restrictions on public employee pension programs--so-called 457 plans--making the plans interchangeable with 401(k) savings plans, for example. That is expected to boost the "portability" of plan assets when workers move between the public and private sectors.

In addition, the law change would allow public employees to buy service credits in so-called defined-benefit plans--the type of pension that pays a monthly benefit for life. Lopez said Davis also expects to sign this bill.

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