Last month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations. Unfortunately, the bulk of the retirement savings limits will not increase from 2007.
"Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. Like 2007, you can contribute up to $15,500 into a 401(k) or 403(b) plan through salary deferrals in 2008," explains Andrew Schwartz CPA, founder of FindAGoodCPA.com, a site where taxpayers can locate a tax professional in their metropolitan area based on the professional's specialty.
Anyone 50 or older by December 31, 2008 can contribute an extra $5,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $20,500. That is the same as what was allowed during 2007.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. "SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals. For 2008, the maximum contribution into your SIMPLE remains at $10,500. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2008, for a total annual contribution of $13,000, unchanged from 2007," says Schwartz.
Self-employed individuals can contribute up to 20% of their net self-employment income into a SEP IRA. The maximum contribution into a SEP IRA for 2008 has been increased by $1,000, up to $46,000.
Solo 401(k)'s are an attractive alternative to many sole proprietors and business owners with no full time employees who work more than 1,000 hours per year besides a spouse. These plans make it easier for people to hit next year's max of $46,000. For anyone 50 or older, the maximum contribution into a Solo 401(k) jumps to $51,000, due to a "catch up" contribution of $5,000 allowed with these types of plans.
The IRS also announced that the maximum amount of wages and net self-employment income that can be used to determine certain retirement plan contributions has increased to $230,000 for 2008, up from $225,000 in 2007.
Increase to IRAs
"Don't forget about IRA's," says Schwartz. "Thanks to the 2001 Tax Act, the amount you and your spouse can each contribute into an IRA is scheduled to increase by 25%, from $4,000 in 2007 up to $5,000 in 2008. Anyone 50 or older can also contribute an extra $1,000 into their IRA, increasing the total allowable contribution to $6,000. You have until April 15, 2009 to max out your IRA contributions for 2008."
There is also good news for people looking to contribute to a Roth IRA in 2008. The amount that people can earn and still contribute to a Roth has increased by $3,000 for married couples to $169,000, and by $2,000 for single individuals to $116,000.
For people whose income is too high for a Roth, don't forget that the rules changed last year, eliminating the $100,000 income limitation for Roth conversions as of 2010. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.
"And if you're married and your spouse isn't covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $159,000 - $169,000, which is identical to the Roth IRA phase-out limits," says Schwartz.
Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2007 winding down, now's the time for people to start thinking about resetting their monthly retirement savings goals for 2008.
About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of FindAGoodCPA.com, a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare, real estate professionals, and lawyers. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.