Resources: Financial Planning: Elective Deferrals

Elective Deferrals Increase

Maximum annual amounts of elective deferrals and IRA contributions are increased and additional “catch-up” contributions may be allowed for individuals aged 50 and over.

We would like to bring to your attention some new enhancements that may be provided to certain tax-favored retirement vehicles such as 401(k) plans and IRAs. These enhancements come courtesy of legislation that increases the annual amount of tax-deferred elective contributions that employees can make to certain retirement plans, and the annual amount of contributions that individuals can make to IRAs, including Roth IRAs.

The opportunity for an employee to make “elective deferrals,” i.e., to contribute a portion of his compensation, on a tax-deferred basis, to a 401(k) plan, SIMPLE IRA plan, simplified employee pension (SEP), 403(b) plan, and/or governmental section 457 eligible deferred compensation plan, is one of the most attractive means of saving for retirement. But the Code specifically provides annual limits on the amount of elective deferrals, and indirectly limits elective deferrals through nondiscrimination rules and overall limitations on contributions. In addition, many plans provide a cap, usually as a percentage of compensation, on the amount that an employee can contribute to the plan on a tax-deferred basis. For 2006, the increased limits on 401(k), 403(b), and SAR SEP elective deferral limit will be $15,000.If you are 50 or over by the end of 2006, this limit is $20,000. While no plan is required to provide employees with the opportunity to make catch-up contributions, it is expected that many employers will amend their plans to provide for catch-up contributions. In the meantime, it is important for you to monitor the contribution amount. I have found that some employers either are not aware of the increase or ignore the increase unless you specifically request it.

Under the 2001 Tax Act, not only have the dollar limits for elective contributions been increased, but plans may allow employees who will be age 50 by the end of a year to make additional “catch-up” contributions in the year—regardless of otherwise applicable limits. The maximum annual catch-up contribution for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $5,000 for 2006 and later years. The maximum annual catch-up contribution for SIMPLE 401(k) plans and SIMPLE IRA plans is $2,500 for 2006 and later years. Generally, if the plan so allows, an eligible employee would be able to make catch-up contributions up to the maximum amount for the year, over and above the otherwise applicable limit on the amount of elective deferrals that the employee would have been entitled to make. Again, this must be specifically requested.

The amount that an individual can contribute to an IRA or Roth IRA is $4,000 in 2005 through 2007; and $5,000 in later years.

In addition, individuals who are 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000 for 2006 and later years. Thus, these individuals can make IRA or Roth IRA contributions of $5,000 in 2006 and 2007; and $6,000 in later years.

Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Also, a technical correction act may change some of the information presented in this article. Readers should not take specific action based on this summary without first consulting the statute and regulations or seeking advice from a qualified professional.

Information in this material is for general purposes only. You should consult Sechrest & Bloom, LLC
at 978-263-7771 for specific recommendations about your particular situation.

This article was supplied or updated on October 4, 2005.

Home About Services Resources Contact
		Resources \| Financial Planning
Overview Business Financial Planning Elective Deferrals Your Financial Paperwork First Time Homebuyer and IRA Withdrawals Funding Health Care Expenses Planning for College Roth IRA – Is it the Best IRA for You? Individual QuickBooks Other		Elective Deferrals Increase Maximum annual amounts of elective deferrals and IRA contributions are increased and additional “catch-up” contributions may be allowed for individuals aged 50 and over. We would like to bring to your attention some new enhancements that may be provided to certain tax-favored retirement vehicles such as 401(k) plans and IRAs. These enhancements come courtesy of legislation that increases the annual amount of tax-deferred elective contributions that employees can make to certain retirement plans, and the annual amount of contributions that individuals can make to IRAs, including Roth IRAs. The opportunity for an employee to make “elective deferrals,” i.e., to contribute a portion of his compensation, on a tax-deferred basis, to a 401(k) plan, SIMPLE IRA plan, simplified employee pension (SEP), 403(b) plan, and/or governmental section 457 eligible deferred compensation plan, is one of the most attractive means of saving for retirement. But the Code specifically provides annual limits on the amount of elective deferrals, and indirectly limits elective deferrals through nondiscrimination rules and overall limitations on contributions. In addition, many plans provide a cap, usually as a percentage of compensation, on the amount that an employee can contribute to the plan on a tax-deferred basis. For 2006, the increased limits on 401(k), 403(b), and SAR SEP elective deferral limit will be $15,000.If you are 50 or over by the end of 2006, this limit is $20,000. While no plan is required to provide employees with the opportunity to make catch-up contributions, it is expected that many employers will amend their plans to provide for catch-up contributions. In the meantime, it is important for you to monitor the contribution amount. I have found that some employers either are not aware of the increase or ignore the increase unless you specifically request it. Under the 2001 Tax Act, not only have the dollar limits for elective contributions been increased, but plans may allow employees who will be age 50 by the end of a year to make additional “catch-up” contributions in the year—regardless of otherwise applicable limits. The maximum annual catch-up contribution for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $5,000 for 2006 and later years. The maximum annual catch-up contribution for SIMPLE 401(k) plans and SIMPLE IRA plans is $2,500 for 2006 and later years. Generally, if the plan so allows, an eligible employee would be able to make catch-up contributions up to the maximum amount for the year, over and above the otherwise applicable limit on the amount of elective deferrals that the employee would have been entitled to make. Again, this must be specifically requested. The amount that an individual can contribute to an IRA or Roth IRA is $4,000 in 2005 through 2007; and $5,000 in later years. In addition, individuals who are 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000 for 2006 and later years. Thus, these individuals can make IRA or Roth IRA contributions of $5,000 in 2006 and 2007; and $6,000 in later years. Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Also, a technical correction act may change some of the information presented in this article. Readers should not take specific action based on this summary without first consulting the statute and regulations or seeking advice from a qualified professional. Information in this material is for general purposes only. You should consult Sechrest & Bloom, LLC at 978-263-7771 for specific recommendations about your particular situation. This article was supplied or updated on October 4, 2005.

Resources | Financial Planning

Elective Deferrals Increase