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May 15, 2005 -- It seems like the maximum annual amounts of elective deferrals and IRA contributions are changing every year. Can you go over the amounts for 2005?

Yes there are 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 recent 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.

The maximum annual elective deferral for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $13,000 for 2004; $14,000 for 2005; and $15,000 for 2006. For SIMPLE plans, the maximum annual elective deferral is $9,000 for 2004 and $10,000 for 2005.

Recent tax law changes not only increased the dollar limits for elective contributions, but 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. Although these additional contributions are called “catch-up” contributions, there is no requirement that an employee have missed a previous opportunity to make elective deferrals in order to be eligible to make the additional contributions.

The maximum annual catch-up contribution for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $3,000 for 2004; $4,000 for 2005; and $5,000 for 2006 and later years. The maximum annual catch-up contribution for SIMPLE 401(k) plans and SIMPLE IRA plans is $1,500 for 2004; $2,000 for 2005; and $2,500 for 2006 and later years.

For many years, the amount that an individual could contribute to an IRA or Roth IRA was limited to $2,000. Now, an individual can contribute to an IRA or Roth IRA up to $3,000 for 2004; $4,000 for years 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 $500 for 2004 and 2005; and $1,000 for 2006 and later years. Thus, these individuals can make IRA or Roth IRA contributions of $3,500 for 2004; $4,500 for 2005; $5,000 for 2006 and 2007; and $6,000 for later years.

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