IRA Contribution Limits

The Economic Growth and Tax Relief Reconciliation Act, which went into effect on January 1, 2002, included major changes to the laws governing Individual Retirement Accounts (IRAs), providing for increases in IRA contribution limits.

Year	Traditional/Roth	Traditional/Roth Catch Up	SIMPLE	SIMPLE Catch Up	401(k) 403(b)	401(k) 403(b) Catch Up
2006	$4,000	$5,000	$10,000	$12,500	$15,000	$20,000
2007	$4,000	$5,000	$10,500	$13,000	$15,500	$20,500
2008	$5,000	$6,000	-	-	-	-
2009	$5,000	$6,000	-	-	-	-

 

Traditional/Roth IRA Contribution Limits

The contribution limit for both Traditional and Roth IRAs is $4,000 and will increase again, to $5,000 in 2008. After 2008, the contribution limit will be annually indexed in $500 increments, adjusted for the cost-of-living (COL). The chart below shows the contribution limits for both the Traditional and Roth IRA.

Year	Traditional/Roth
2006	$4,000
2007	$4,000
2008	$5,000
2009	$5,000

 

“Catch up” Contributions

Americans who have reached the age of 50 have the ability to contribute more to their retirement account under the "catch up" provisions of the 2002 legislation. The amount of the "catch up" for Traditional and Roth IRAs is capped at $1,000 for 2006. In order to qualify, an individual must have reached the age of 50 in the year in which they make the "catch up" contribution.

Year	Traditional/Roth Catch UP
2006	$5,000
2007	$5,000
2008	$6,000
2009	$6,000

 

SEP IRA Contribution Limits

A SEP IRA owner may contribute up to 25% of an employee's compensation up to the annual compensation cap. The annual compensation cap in 2006 is $220,000 and $225,000 for 2007 and then subject to annual cost-of-living adjustments for later years. The maximum dollar amount that may be contributed in 2006 is $44,000 ($45,000 in 2007 and then subject to annual cost-of-living adjustments for later years).

It should also be noted that your spouse and children may also participate in the plan and open their own SEP IRAs - as long as they are employees of the company.

SIMPLE IRA Contribution Limits

An employee may elect to make a pre-tax salary reduction contribution to a SIMPLE IRA, rather than have that amount paid directly to the employee in cash. An employee may make an annual elective contribution up to the lesser of 100% of compensation or the maximum dollar limitation. The maximum dollar limitation for 2006 is $10,000   ($10,500 in 2007). For years beginning after 2007, cost-of-living adjustments will be made to the maximum dollar amount by the Secretary of Treasury. In addition, employees who have attained age 50 by the end of the calendar year, may elect to make an additional "catch-up" contribution in addition to their regular contribution. The maximum "catch-up" contribution in 2006 and 2007 is $2,500, which will then be indexed for inflation and increase in $500 increments. The employer must contribute an employee's elective contributions to the SIMPLE IRA no later than 30 days after the last day of the month for which the contributions are made. $12,500.

An employer must make either a matching contribution or a nonelective contribution under a SIMPLE IRA plan. If the employer chooses to make a matching contribution, the employer must match the employee's elective contribution on a dollar-for-dollar basis up to a limit of 3% of the employee's compensation. The 3% limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if: (i) the limit is not reduced below 1%; (ii) the limit is not reduced for more than 2 years out of the 5-year period that ends with the year for which the election is effective; and (iii) employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees may enter into salary reduction agreements regarding their contribution to the SIMPLE IRA.

In the alternative, an employer may elect to make a non-elective contribution of 2% of compensation for each eligible employee. A non-elective contribution must be made for each eligible employee regardless of whether the employee actually elects to make a salary reduction contribution. For purposes of the 2% non-elective contribution, the annual compensation limitation (i.e. $220,000 in 2006 as may be subsequently adjusted) applies.

A separate SIMPLE IRA is also available to your spouse and other family members - if they have received at least $5,000 in compensation during any two years preceding the current calendar year and are reasonably expected to earn at least $5,000 during the current calendar year they are eligible to participate in the plan.

Shown in the chart below are contribution and catch up provisions for the SIMPLE IRA.

Year	SIMPLE	SIMPLE Catch Up
2006	$10,000	$12,500
2007	$10,500	$       $13,000
2008	(Indexed)	(Indexed)
2009	(Indexed)	(Indexed)

 

Individual 401(k) Contribution Limits

Two components comprise the maximum Individual 401(k) plan contribution: an employee salary deferral contribution and an employer profit sharing contribution.

For 2006, each owner working in the business is able to contribute up to lesser of 100% of compensation or $15,000. After 2006, this $15,000 will be indexed to inflation and adjusted by the Treasury Department. In addition, the separate profit sharing contribution, if any, that can be made to an Individual (k) arrangement is limited to 25% of the employee's compensation up to the annual compensation cap (if the business is a corporation) or 20% of the employee's self-employment income (if a sole proprietorship or partnership). The annual compensation cap in 2006 is $220,000 and $225,000 for 2007 and then subject to annual cost-of-living adjustments for later years. There is a total contribution limit applicable to both sources of $44,000 in 2006 ($45,000 in 2007 and then subject to annual cost-of-living adjustments for later years).

In addition to the contribution limits stated above, an employee 50 years of age or older may also make an additional "catch-up" contribution to the Individual (k) plan. The permissible "catch-up" contribution amount for 2006 is $5,000. If the employee is 50 years of age or older, the total contribution limit for 2006 will be $49,000 and $50,000 for 2007.

Also remember that spouses are eligible to open their own Individual 401(k) account provided they have separate income and are covered in the plan..

Don't Forget About an IRA for your Spouse and Children

The spousal IRA allows a married person to make a self directed IRA contribution for his/her spouse. A couple can contribute up to 100% of their combined earned incomes or$8,000, whichever is less, for tax year 2006 (plus an extra $1,000 per person under the "catch-up" provision, if both individuals are 50 years of age or older, bringing the total amount to $10,000). Your children can also have an IRA account if they have income, including from your business.

Coverdell Education Savings Account (ESA) Contribution Limits

The annual contribution limit for a Coverdell Education Savings Account (ESA) is $2,000. The Modified Adjusted Gross Income qualification limits for the ESA phase out between $95,000 - $110,000 for individuals and between $190,000 - $220,000 for married couples filing jointly.

Under the regulations enacted in 2002, a child may contribute to his/her own ESA, even if he/she does not have earned income. This will make it much easier for a child to start and contribute to an Education Savings Account.

Filing Status	Full Contribution for MAGI	Partial Contribution for MAGI between
Single	$95,000 or less	$95,000 - $110,000
Married, filing jointly	$190,000 or less	$190,000 - $220,000

 

Health Savings Account Contribution Limits

Health Savings Accounts (HSAs) were created in the Medicare legislation signed into law in December of 2003. As of October 1, 2004, Equity Trust Company became the first provider in the nation to offer self directed Health Savings Accounts. This provides our clients an opportunity to reduce their costs for health insurance by as much as 70% and have one more way to invest in assets in which they have knowledge and expertise.

For 2006, an individual may contribute up to $2,700 (for 2007, this amount is $2,850), and a family may contribute up to $5,450 (for 2007, this amount is $5,650) (as both amounts may be adjusted in later years by the Treasury Department).

In addition to the standard HSA contribution limits discussed above, if an individual is between 55 and 64 years old prior to the close of the calendar year, then the individual may also make a contribution known as a "catch-up" contribution. The limit for the catch-up contribution is $700 for 2006, and is scheduled to increase through 2009 as shown in the table below.

CATCH-UP CONTRIBUTION LIMITS

Taxable Year                                                     Maximum HSA Catch-up

 

      2007                                                                      $800

      2008                                                                      $900

      2009 and later                                                        $1,000

These limits are also pro-rated for the number of months the HDHP has been open.

For a more thorough and up-to-date explanations see the IRS website.

 

**Information is accurate as of January 19, 2007