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Retirement Plan Limits for 2008 November 12, 2007 By Scott Whittemore The annual cost-of-living adjustments (COLAs) announced by the IRS each October provide an excellent opportunity for you to talk to clients about the need to factor inflation adjustments into their retirement plans. Starting in 2008, clients who are still in the accumulation phase may be able to stash a bit more into their retirement plans. Unfortunately for participants in 401(k) plans, they cannot put away more than last year, as the limit for 401(k) plans is unchanged at $15,500. The increases in other retirement-plan contribution limits are small this year. For example, the maximum that can go into a defined-contribution plan is up just $1,000 to $46,000. The maximum annual benefit under a defined-benefit plan rises to $185,000. IRA contribution limits are set by law to go up to $5,000 in 2008, up from $4,000 in 2007. The catch-up for people over 50 remains at $1,000. Clients who have not yet contributed for 2007 and are planning to do so by April 15, 2008, could contribute up to $9,000 if under 50 and $11,000 if over 50 by combining their 2007 and 2008 contributions. The income limitations for IRA deductibility by individuals covered by a retirement plan go up slightly in 2008: $85,000 (up from $83,000) for married couples filing jointly, $53,000 (up from $52,000) for single taxpayers, and $159,000 (up from $156,000) for a taxpayer who is not a participant but whose spouse is. Table 1: Pension Plan Limits 2008 2007 Maximum annual benefit under a defined-benefit plan $185,000 $180,000 Maximum annual contribution for defined-contribution plans $46,000 $45,000 Annual compensation limit used for determining retirement plan contributions $230,000 $225,000 Maximum annual contribution to 401(k), 403(b), and 457 plans $15,500 $15,500 Catch-up contribution for individuals age 50 or over $5,000 $5,000 Maximum annual SIMPLE employee deferral $10,500 $10,500 SIMPLE catch-up deferral $2,500 $2,500 SEP minimum compensation $500 $500 Income of key employee in top-heavy plan $150,000 $145,000 Definition of highly compensated employee $105,000 $100,000 Maximum annual IRA contribution $5,000 $4,000 Catch-up IRA contribution $1,000 $1,000 The adjusted gross income limitations for maximum Roth contributions rise slightly in 2008: $159,000 (from $156,000) for married couples filing jointly, and $101,000 (from $99,000) for single taxpayers. The income limitation for Roth conversions is not adjusted for inflation and remains at $100,000. An interesting situation with Roth conversions opens up in 2010. The income limitation for Roth conversions will be lifted with special provisions for paying the tax over the following two years. Start looking for clients now that could benefit from this unique opportunity to convert retirement assets to a Roth. Earning tax-free income in retirement is becoming more important than ever for retirees. Taxable income, because it affects not just their regular income tax, but the tax they'll pay on Social Security benefits and Medicare Part B premiums (see below) is even more expensive for retirees. Retirees may not be in a lower income tax bracket in retirement when you factor in the various taxes on Social Security and Medicare. Required minimum distributions from tradition IRAs that are not converted to Roths could drive your clients into higher tax brackets than necessary. Next week we will look at Social Security COLA adjustments.

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