New Retirement Plan Limits For 2008

The IRS and Social Security administration have announced the limits that apply to retirement plans for 2008. While some limits remain unchanged from the 2007 limits, those that have been changed present opportunities to increase contribution amounts to your retirement nest egg.

In this article, we'll break down the recent plan changes, explain some retirement plan concepts and show you what you need to know to plan for your retirement properly.

The following charts showcase the highlights of the 2008 retirement plan announcements. (To read more about recent legal changes that affect your retirement, see Pension Protection Act Of 2006 Becomes Law and Recent Legislative And Other Updates.)

Other Changes

Limited Distribution Period for ESOPs
The dollar amount, under the limited distribution period for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period, is increased from $915,000 to $935,000, while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $180,000 to $185,000.
Compensation Cap for Governmental Plans
The annual compensation cap for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation cap to be taken into account, is increased from $335,000 to $345,000 .

Opportunities
While the changes made may seem insignificant, the opportunities created by the increased funding limits can add up to significant amounts overtime. Consider the following for instance:

Increased IRA contribution limit: Being able to add $1,000 more to your nest egg each year through IRA contributions can make a big difference. For instance, assuming a rate of return of 8%, the $1,000 would add the following amounts: $15,645 after 10 years, $49,243 after 20 years, $122,346 after 30 years and $279,781 after 40 years.
Increased contribution limit under a defined contribution plan or SEP IRA: With the increase in contribution limit from $45,000 to $46,000, your contributions to these plans can result in the same amounts indicated immediately above under Increased IRA contribution limit, providing you have sufficient compensation. (For more on SEP IRAs, see Establishing an SEP IRA, 401(k) Plans For The Small-Business Owner and Plans The Small Employer Can Establish.)
If these amounts are added to a Roth IRA, or Designated Roth Account, the earnings could be tax-free. (To read more about Roth IRA contributions, see Roth IRA: Back To Basics.)
With the increase of $5,000 in the compensation cap, this presents an additional opportunity for you to receive larger contribution amounts, if your compensation is much higher than that of other employees.

Reminders

The salary deferral limit applies across all 401(k), 403(b), federal government’s Thrift Savings Plan, SARSEP and SIMPLE plans. Therefore, regardless of the number of plans in which you participate, you salary deferral contribution cannot be more than $15,500 for the year. Additionally, your catch-up contribution cannot be more than $5,000 for the year. (For more on SIMPLEs, see Introduction To SIMPLE 401(k) Plans and SIMPLE IRA Vs SIMPLE 401(k) Plans.)
Contributions to 457(b) plans are not aggregated with contributions to 401(k), 403(b), federal government’s Thrift Savings Plan, SARSEP and SIMPLE plans. For instance, if you participate in a 457(b) plan and a 403(b) plan, you could make salary deferral contributions of $15,500 catch-ups to each plan, bringing the total to $$31,000 + catch-up of $10,000. (To learn more about catch-up contributions, see New Year's Resolutions To Improve Your Finances and Retirement Savings Tips For 45- To 54-Year-Olds.)
The annual addition limit of $46,000 does not include catch-up contributions. Therefore, if you participate in a plan with a salary deferral feature, your contribution for the year can be up to $46,000 + catch-up contribution of $5,000.
If you contribute to more than one traditional or Roth IRAs, or a traditional and Roth IRA, for the year, your contribution to all your IRAs cannot exceed $5,000 + $1,000 catch-up contribution.

Conclusion
Be aware of these changes when you meet with your financial planner to review your retirement planning for the year. This is especially important if you participate in multiple employer-sponsored plans or contribute to more than one traditional/Roth IRAs. Contributions in excess of these limits can result in excess contributions, which are subject to excise tax unless timely corrected.

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.