With 2008 now in full swing, it’s time to make sure you are maximizing the amount you put into your retirement savings. On that subject, this month we will review the contribution limitations for 2008.
Before we get into the limitations, it’s important to remember there are two basic types of plans. A defined benefit plan is one where your employer makes annual contributions intended to provide a specific benefit when you retire. For example, your employer may sponsor a plan designed to pay you based on 2% times your years of service times the average of your three highest years of pay. A defined contribution plan is designed to allow you and/or your employer to make a specific contribution each year and your ultimate retirement benefit is not guaranteed. Because of the cost considerations, most plans offered by employers today are ‘defined contribution’ ones.
While the benefits available under ‘defined contribution’ plans have increased for 2008, most employees have little or no control over defined benefit plans. Because of this, our discussion will center on ‘defined contribution’ plans.
401(k) and 403(b) Plans
If your employer offers either a 401(k) or 403(b) plan, the maximum you can contribute for 2008 is $15,500, excluding any catch-up contributions. If you are 50 years old or older, you can also make an additional $5,000 contribution. These amounts remain unchanged from 2007, but it’s important to remember that you have the option to make elective deferrals up to the amount of your salary.
Many 401(k) plans include a provision allowing for optional employer profit sharing contributions. The amount contributed is generally a percentage of salary, subject to a maximum eligible compensation. The maximum amount for 2008 is $230,000 - or a $5,000 increase over 2007.
SIMPLE and SEP Retirement Accounts
If your employer sponsors a SIMPLE retirement account, the maximum you will be able to defer for 2008 will be $10,500 if you are under 50 years old. Those of you age 50 or older will be able to defer an additional $2,500. In general, SIMPLE plans require a 3% employer match. The amount of income subject to the 3% calculation increases to $230,000 in 2008 from $225,000 in 2007.
Since contributions to a SEP plan are based on eligible income only, the increase in eligible compensation to $230,000 for 2008 effectively increases the maximum allowable contribution.
Individual Retirement Accounts
If your employer does not sponsor a retirement plan, or if your income does not limit your deductions - regardless of plan participation - there is a little good news for 2008. The maximum amount you can contribute in 2008 increases to $5,000 from $4,000 in 2007 (the amount of the catch-up contribution for those over 50 remains at $1,000).
2007 Is Not Quite Finished
If you are still looking for deductions to offset your 2007 income, don’t forget you can still establish an IRA or SEP plan and fund it prior to filing your 2007 income tax return. Assuming you have not already done so, you have until April 15 to contribute to an IRA and deduct it from your 2007 income. You can establish and contribute to a SEP up to the time you file your business income tax return, including extensions. This effectively gives you until October 15 to fund a SEP and thus reduce your 2007 income.
The Bottom Line
Retirement planning typically falls on the individual, rather than the company, to fund these days. Make sure you defer the maximum amount possible to both help you live comfortably in retirement and minimize your current year tax burden.
Have a terrific February.