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January 16, 2007 > New retirement plan contribution limits boost savings potential

New retirement plan contribution limits boost savings potential

By Jason Alderman

Benjamin Franklin once said, "Nothing can be said to be certain, except death and taxes." Although I don't have any updates on the former, at least where taxes are concerned I do have some positive news:

As it does every year, the Internal Revenue Service announced 2007 cost-of-living adjustments to many of the amounts you and your employer can contribute toward your retirement accounts. These new limits mean most people will be able to contribute more money in tax-advantaged accounts for their retirement savings.

Key changes include:
Defined contribution plan limits. The maximum amount employees may contribute to a 401(k), 403(b) or 457 plan rose by $500 to $15,500 for 2007. In addition, workers over age 50 may contribute up to an additional $5,000 per year - the same as last year. The limit for combined employee and employer contributions to defined contribution plans rose from $44,000 to $45,000.

Going forward, contribution limit increases will be indexed to the annual Consumer Price Index (CPI), in $500 increments. If the inflation-indexed amount in any one year isn't high enough to clear the $500 hurdle, (as was the case with the 2007 "catch-up contribution" amount) it will be added to the following year's inflation-indexed amount.

Remember, your pretax contributions to these plans lower your taxable income, which in turn lowers your taxes. To learn more about how 401(k) plans work, go to Practical Money Skills for Life, a free personal financial management site sponsored by Visa USA (www.practicalmoneyskills.com/benefits).

Defined benefit plan limits. The annual limit on how much employees can receive from a defined benefit plan (or pension) increased from $175,000 to $180,000 in 2007.

SIMPLE plan contributions. The employee contribution limit for these small employer plans, which resemble 401(k) plans, has increased from $10,000 to $10,500. Maximum catch-up contributions remain at $2,500.

Individual Retirement Accounts (IRAs). The IRA contribution limit for the 2007 tax year remains unchanged from its 2006 level of $4,000 ($5,000 for age 50 and older). However, the phase-out range for regular IRAs (within which your ability to take tax deductions for your contributions is reduced or eliminated) has been raised to $83,000 to $103,000 for married couples filing jointly and $52,000 to $62,000 for singles. Similarly, phase-out ranges for Roth IRA contributions have increased: they are now $156,000 to $166,000 for married couples and $99,000 to $114,000 for singles. To learn more about phase-out ranges and other IRA specifics, visit www.irs.gov/retirement.

Simplified Employee Pension (SEP) plans. In these plans, an employer (or person, if self-employed) contributes directly to an IRA for the individual. The annual minimum wage you must earn to participate has increased from $450 to $500. The maximum contribution allowed is a percentage of pay (25 percent if the company is incorporated; 20 percent if it's not) up to an annual pay limit of $225,000 in 2007 - a $5,000 increase from 2006.

Social Security wage base. The maximum earnings amount subject to Social Security tax increased to $97,500, from $94,200 in 2006. Also, 2007 Social Security benefits increased by 3.3 percent, based on the most recent change to the CPI. For more information on Social Security benefits, cost-of-living adjustments, retirement benefit calculations and more, go to www.socialsecurity.gov.

Inflation will probably never go away, but at least the government takes it into account when determining how much you and your employer can contribute to your retirement savings.

Jason Alderman directs the Practical Money Skills for Life program for Visa USA. More retirement planning tips can be found at www.practicalmoneyskills.com. As always, consult a financial professional regarding your particular situation.

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