Limitations on Tax-Favored Retirement Savings

After reading the last couple of posts, I expect you may be convinced, as I am, that a tax-favored retirement plan is the best place to accumulate your retirement savings target. “I’m going to do all my saving inside a tax-favored retirement plan,” you say. Not so fast, Froggy. Congress has imposed annual limits on how much you can add to these types of plans. Here’s a quick and dirty guide to these limits for 2009.

Individual Retirement Accounts (traditional IRA or Roth IRA)
• $5,000 (plus cost of living adjustment beginning 2010)
• Plus additional $1,000 if you will have reached age 50 by December 31, 2009 (plus cost of living adjustment beginning 2010)
• Also limited to your earned income (e.g., salary or self-employment income, but not interest or dividends)
• Aggregate contributions to traditional and Roth IRAs are subject to above limits
• Roth IRA contribution not allowed (or limited) if you have adjusted gross income over:
o $105,000 if single
o $166,000 if married filing jointly
• Contribution to traditional IRA may or may not be deductible (the subject of a future post)

401(k) plans and 403(b) plans and 457 plans
• Elective deferral limits:
o $16,500 (plus cost of living adjustment beginning 2010)
o Plus additional $5,500 if you will have reached age 50 by December 31, 2009 (plus cost of living adjustment beginning 2010)
o Limits apply in the aggregate to elective deferrals to all employer plans you participate in
• Other employer contributions (e.g., matching contribution and/or profit sharing contributions):
o $49,000 (plus cost of living adjustment beginning 2010)
o Also limited to 25% of your compensation from the employer
o Your employer may also fund a traditional defined benefit pension plan for you

Simplified Employee Pension Plans (SEPs)
• $49,000 (plus cost of living adjustment beginning 2010)
• Also limited to 25% of your compensation from the employer

SIMPLE IRA Plans
• Elective deferral limits:
o $11,500 (plus cost of living adjustment beginning 2010)
o Plus additional $2,500 if you will have reached age 50 by December 31, 2009 (plus cost of living adjustment beginning 2010)
• Other employer contribution:
o Dollar-for-dollar matching contribution for elective deferrals of up to 3% of compensation; or
o Non-elective employer contribution of 2% of compensation