Many taxpayers meet with their financial advisors at the beginning of each year to determine how much they can add to their retirement nest egg for the current and upcoming tax years. Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), various limits on retirement plan contributions were increased, effective for tax year beginning 2002, allowing you to add more to your tax-deferred accounts. To make realistic projections for your retirement planning, you need to be aware of these limits and the other benefits brought about by EGTRRA.
  
Saver's Tax Credit
As a means of encouraging certain taxpayers to contribute to their retirement plan, congress included a provision in EGTRRA, which allows eligible individuals a tax credit for contributions made to IRAs and employer-sponsored retirement plans. This tax credit, will helps offset the first $2,000 contributed to an individual's retirement plan, is available for years 2002 and after. To be eligible for the tax credit, a taxpayer must meet the following requirements:

• Will be at least 18 years old by the end of the tax year
• Is not a dependent of another tax payer
• Is not a full-time student
• Does not earn more than the amount indicated in the chart below (based on filing status)

The following chart shows the percentage of tax credit the taxpayer is allowed, based on his/her tax-filing status and income. For example, an individual who is married, files a joint income-tax return and earns no more than $33,000 will be allowed to claim 50% of the first $2,000 contributed to his/her retirement plan. The tax credit for the year cannot exceed $1,000.

Credit Rate	Married and files a joint return	Files as head of household	Other categories of filers
50%	Up to $33,000	Up to $24,750	Up to $16,500
20%	$33,001 – $36,000	$24,751 – $27,000	$16,501 – $18,000
10%	$36,001 – $55,500	$27,001 – $41,625	$18,001 – $27,750
0%	$55,501+	$41,626+	$27,751+

This tax credit was made available from 2002 to 2006 under EGTRRA, but was made permanent under the Pension Protection Act of 2006 (PPA). (To read more about the PPA, see The Pension Benefit Guaranty Corporation Rescues Plans, Pension Protection Act Of 2006 Becomes Law and The Pension Bill: A Wolf In Sheep's Clothing.)

Increased IRA Contribution Limit
Under EGTRRA, the participant contribution limits for IRAs were increased. Individuals age 50 and older may contribute amounts in addition to these new limits. These additional amounts are referred to as "catch-up contributions", so called because they allow those who were unable to fund a retirement account in earlier years to catch up on funding their retirement nest egg. The IRA participant contribution limits are as follows:

Year	Contribution Limit	Additional Catch-Up Amount
2004	$3,000	$500
2005	$4,000	$500
2006	$4,000	$1,000
2007	$4,000	$1,000
2008	$5,000	$1,000
2009	$5,000	$1,000
Potential cost-of-living-adjustment (COLA) increase in increments of $500 for tax years beginning 2009. COLA based on the consumer price index.

Increased Salary-Deferral Limits
If you participate in an employer-sponsored plan, your salary-deferral limits were also increased under EGTRRA. Now, you can defer up to 100% of your compensation, up to the dollar limit that is in effect for the year. Making pre-tax salary deferral contributions to your employer-sponsored plan is beneficial because it reduces your current taxable income. These amounts will be taxed when withdrawn, but projections usually assume that the withdrawal will take place during your retirement years, when your income and income tax rate will likely be lower.

Taxpayers who want to contribute the maximum salary-deferral amount may need to start early in the year. Starting early will allow you to spread the amount over the year and therefore lessen the effect of reducing your current disposable income. For instance, if may be easier to contribute $1,000 per month, instead of $12,000 all at once.
The salary-deferral limits are as follows:

SIMPLE IRA & SIMPLE 401(k)

Year	Salary deferral limit	Catch-up contribution limit
2004	$9,000	$1,500
2005	$10,000	$2,000
2006	$10,000	$2,500
2007	$10,500	$2,500
2008	$10,500	$2, 500
2009	$11,500	$2,500

Regular 401(k), 403(b) and Salary-Reduction SEPs (SARSEPs)

Year	Salary deferral limit	Catch-up contribution limit
2004	$13,000	$3,000
2005	$14,000	$4,000
2006	$15,000	$5,000
2007	$15,500	$5,000
2008	$15,500	$5,000
2009	$16,500	$5,500

While these limits are established under federal law, your employer may implement lower limits. For instance, your employer may limit your salary deferral contributions your 401(k) account, to 10% of your compensation. If your compensation for the year of $50,000, this means you would be eligible to make salary deferral contributions of no more than $5,000 ($50,000 x 10%) for the year to the account.

Employer-Contribution Limit
For SEPs, IRAs, profit-sharing plans, money purchase pension plans and 403(b) accounts, your employer may contribute up to $49,000 to your account for the year. For 401(k) and 403(b) plans, this $49,000 includes amounts you may contribute as salary deferrals, but does not include your catch-up contributions. As such, if you are at least age 50 by year-end, your total contribution can be $49,000 + $5,500 catch-up. The amount your employer contributes is never taxed to you until it is withdrawn from your retirement account. Ask your employer about the withdrawal rules for their retirement plan.

For SIMPLE plans, your employer may either match your contribution to the plan dollar-for-dollar up to 3% of your compensation or make a non-elective contribution of 2% of your compensation. A non-elective contribution is made on behalf of each eligible employee, regardless of whether or not he/she makes a salary-deferral contribution. This is unlike a matching contribution, which is made only on behalf of those who make a salary-deferral contribution. Be sure to ask your employer about the type of contribution he/she will make each year. (For more on SIMPLEs, see SIMPLE IRA Vs SIMPLE 401(k) Plansand Introduction To SIMPLE 401(k) Plans.) 
 
Conclusion
This is by no means the full extent of the changes brought about by EGTRRA. Be sure to consult with your tax professional about how you can benefit most from making your retirement contributions. And where possible, contribute as much as you can; this will help you to reach your nest-egg goal by your projected deadline or even sooner.
 

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.