Retirement Plans

2004 Limits for Retirement Accounts

The Internal Revenue Service recently announced cost-of-living adjustments applicable to dollar limitations for retirement plans for Tax Year 2004. In addition, the Social Security Administration has announced the increase in the Social Security taxable wage base for 2004. Below are the significant changes from the 2003 limits:

	2003	2004
Annual Additions in DC Plans (IRC Sec. 415(c) limit)	$40,000	$41,000
Annual Compensation Limit (Recognized under DC plans)	$200,000	$205,000
Social Security Taxable Wage Base	$87,000	$87,900

Furthermore, EGTRRA gradually increases various retirement plan limits. Here is a listing of those limits for 2003 and 2004:

	2003	2004
401(k)/403(b) Elective Deferrals	$12,000	$13,000
SIMPLE IRA Elective Deferrals	$8,000	$9,000
401(k)/403(b) Catch-up amount*	$2,000	$3,000
SIMPLE Catch-up amount*	$1,000	$1,500

* For individuals age 50 or older

Limits	2004	2003
IRA Contribution Limit	$3,000	$3,000
IRA Catch-Up Contributions	$500	$500
401(k), 403(b), 457, and SARSEP Elective Deferral Limit	$13,000	$12,000
401(k), 403(b), 457, and SARSEP Catch-Up Contributions	$3,000	$2,000
SIMPLE 401(k) and SIMPLE IRA Deferral Limit	$9,000	$8,000
SIMPLE 401(k) and SIMPLE IRA Catch-Up Contributions	$1,500	$1,000
Coverdell Education Savings Account (ESA) Contribution Limit	$2000	$2000
Defined Benefit 415 Dollar Limit	$165,000	$160,000
Compensation Limit Used for Contributions/Benefits	$205,000	$200,000
Defined Contribution 415 Dollar Limit	$41,000	$40,000
Defined Contribution 415 Percent of Pay Limit	100%	100%
§404 Employer Deduction Limit for Profit Sharing Plans as a Percentage of Pay	25%	25%
Top-Heavy Plan Key Employee Compensation Limit	$130,000	$130,000
Highly Compensated Employee Compensation Limit	$90,000	$90,000
SEP Coverage	$450	$450
Taxable Wage Base	$87,900	$87,000
Social Security Tax	6.2%	6.2%
Social Security Tax for Self Employed	12.4%	12.4%
FICA for Employees	7.65%	7.65%

"Catch up" in your 401(k). The catch-up provisions in the 2001 tax law are designed for vigorous savings. And they're quite a bonus. For 2003, employees 50 and older can save an additional $2,000 in their 401(k), 403(b) or 457 plans, on top of this year's $12,000 contribution limit for all workers.

That catch-up amount increases each year until 2006, when employees 50 and older can stash a total of $20,000 in their workplace plan, $5,000 above that year's contribution limit for all workers. Beyond 2006, both the standard limits and the catch-up provisions for all plans will be adjusted annually for inflation.

The 2001 tax law also increases the limits on the pretax dollars that can be put into your plan. The new rules now allow your retirement contributions plus your employer's match and other pre-tax benefits such as profit sharing to total a maximum of 100 percent of compensation or $40,000, whichever is less.

For two-earner couples trying to catch up, this may allow one spouse to put away a huge chunk of his or her salary for retirement. (As with all the new contribution rules, you can take advantage of the catch-up provisions only if your employer has agreed to offer them.)

Even with a relatively short 15-year time frame, that extra stash can make a big difference. If you put away the additional sum every year beginning at age 50 and earn an 8 percent annual return, you could boost your nest egg by more than $200,000 before taxes, according to T. Rowe Price.

"Catch up" in your IRA. Older workers also can make more generous IRA investments. This year, the maximum contribution to all types of IRAs is $3,500 for anyone 50 or older, $500 above the $3,000 limit for everyone else. The IRA cap increases over the years, reaching $6,000 for those 50 and older in 2008.

That means if you are able to take full advantage of the catch-up rules in your 401(k) and your IRA, you'll be able to put away $17,500 in 2003 tax-deferred; by 2008, that number will be $26,000.

The bottom line? If you're a 50-year-old and can fully fund both accounts, you can retire with an estimated $300,000 more than you could have saved tax-free before the 2001 tax-rule changes.

Consider working more. Saving more is the obvious first step if you've undergone some devastating stock market losses and think you'll fall far short of your retirement goal.

But there's another option: working longer. It's a choice more and more employees are considering. According to a survey of high-income investors by Quicken.com, 13 percent of respondents said they are planning to retire later than they originally intended, and more than one-third of those said they would work five extra years or longer.

Assuming you can stay at your job and continue to contribute to your firm's retirement plan, just five extra years of pouring the maximum into your 401(k) can add almost $100,000 to your portfolio, assuming an 8 percent annual return, according to T. Rowe Price. Staying at work when you thought you'd be off seeing the world could mean a major adjustment, but numbers like that might make the delay worthwhile.

Merge plans. In addition to the higher contribution caps, there are some other less-publicized tax-code changes that, indirectly, could help savers who are trying to make up for lost money or lost time.

The new rules make retirement money more portable than ever. And that's especially important later in your career, when job changes may have left you with multiple retirement accounts scattered among different corporate benefits departments and financial institutions.

Now you'll be able to consolidate more of these accounts, making them easier to track and manage. And if you have money trapped in a plan with high fees or poor investment choices, it's now more likely that you can liberate it.

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You now are allowed to roll all 401(k), 403(b) and 457 accounts from previous jobs into an IRA or your current employer's plan if the company permits. And IRAs may be rolled into company-sponsored plans -- again, if the plan allows.

The new rules are especially good for government employees with old 457 plans, which formerly could not be rolled over into another 457, 401(k), 403(b) or IRA.

After-tax nondeductible contributions in a qualified plan such as a 401(k) may be rolled over to another qualified plan or IRA only if the plan provides separate accounting for such contributions.