Roth IRA Contribution Limits & Individual(k)
Limits for Self Employed People
(March 26th, 2008)
The Roth IRA contribution
limits for the years 2003, 2004, 2005, 2006 and 2007 were greatly influenced
by the Economic Growth and Tax Relief Reconciliation Act of 2002, which
advocated for the increase in these Roth IRA contribution limits.
A provision of the act known as the "Sunset Provision" made
it official these that increases in contribution limits will only last
till the year 2010, so now's a good time to get into the Roth IRA! In
2010, the Congress will look at the total decline in revenues generated
from these increased Roth IRA contribution limits, and whether these
increases will become permanent or not.
The Roth IRA contribution limits are summarized
in the table below:
| Year |
Traditional
Roth |
Traditional
Roth Catch Up |
Simple |
Simple
Catch Up |
401k
and 403b Plans |
401k
and 403b Catch Up Plans |
| 2005 |
$4000 |
$4500 |
$10,000 |
$12000 |
$14000 |
$18000 |
| 2006 |
$4000 |
$5000 |
$10,000 |
$12500 |
$15000 |
$20000 |
| 2007 |
$4000 |
$5000 |
(Indexed) |
(Indexed) |
(Indexed) |
(Indexed) |
| 2008 |
$5000 |
$6000 |
- |
- |
- |
- |
| 2009 |
$5000 |
$6000 |
- |
- |
- |
- |
Starting 2005, the Roth IRA contribution
limits will be $4000, and will increase to $5000 in the year 2008. After
2008, the contribution limit will be incremented by $500 a year to adjust
for cost of living and inflation. Therefore, the $5000 you
are seeing for the 2009 column may not be entirely accurate, we will
probably see $5500 in the column.
Individuals who are over the age of 50 will
be able to make Roth IRA Catch Up Contributions of $500 in 2005, which
will then increase to $1000 in 2006. This Catch Up provision
is made possible by the Economic Growth and Tax Relief Reconciliation
Act of 2002. It is meant to encourage people over the age of 50 to contribute
more towards their retirement savings so as to put lesser pressure on
the American Pension and Social Security System.
Individual(k) Contribution Limits
The Individual(k) Contribution Limits consist of
2 types of contributions:
- Employee salary deferral contribution
- Employer profit sharing contribution
The employee can contribute upto $14,000
in salary deferral contributions in 2005, while the employer profit
sharing contribution is limited to 25% of Gross Pay or 20% for Self-Employed
individuals. The total contribution limit for both Salary Deferral
contributions and Employer Profit Sharing Contributions is $42,000 for
the year 2005 (the total compensation cap is $210,000).
Individuals over the age of 50 can make catch
up contributions of an extra $4000 per year, making the total contribution
limit $46000 in 2005.
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Roth IRA Contribution Limits |
| Year |
Regular Contributions |
Catch Up Contributions |
| 2001 |
$2000 |
$0 |
| 2002 |
$3000 |
$500 |
| 2003 |
$3000 |
$500 |
| 2004 |
$3000 |
$500 |
| 2005 |
$4000 |
$500 |
| 2006 |
$4000 |
$1000 |
| 2007 |
$4000 |
$1000 |
| 2008 |
$5000 |
$1000 |
| 2009 |
$5500 |
$1000 |
|
Modified Adjusted Gross Income Limits
|
| Year |
Filing as Single |
Filing as Joint |
| 2001 |
$33,000 - $43,000 |
$53,000 - $63,000 |
| 2002 |
$34,000 - $44,000 |
$54,000 - $64,000 |
| 2003 |
$40,000 - $50,000 |
$60,000 - $70,000 |
| 2004 |
$45,000 - $55,000 |
$65,000 - $75,000 |
| 2005 |
$50,000 - $60,000 |
$70,000 - $80,000 |
| 2006 |
$50,000 - $60,000 |
$75,000 - $85,000 |
| 2007 |
$50,000 - $60,000 |
$80,000 - $100,000 |
|
Roth IRA Facts |
In Traditional IRA, the contributions you make towards the account
are not taxed. Whatever capital gains & earnings you make on
your IRA are also not taxed up until retirement, when you withdraw
money from your account. For example, imagine you made $50,000 this
year and contributed $5000 to a traditional IRA. You will be taxed
on $50,000 - $5000 = $45,000. Furthermore, your $5000 contribution
will grow tax-deferred for many years, until you retire and decide
to withdraw it.
Any 'qualified distributions'
you take from a Roth IRA will NOT be included in your taxable income,
hence making you exempt from paying taxes. You won't have to pay
taxes on the original principal you contributed nor any taxes on
capital gains & earnings you have accumulated. In order for
the distribution to be classified as 'qualified', it must be taken
under 1 of the following circumstances:
- the Roth IRA
investor must be 59 and 1/2 years or older at the time of the distribution
- the Roth IRA investor becomes disabled at the time of taking the
distributions
- the Roth IRA investor dies and his/her beneficiary receives the
assets contained in the plan
- the distributions taken from the Roth IRA will be used in the
purchase or building of a new home for the Roth IRA holder or qualified
family member. This is limited to $10,000 per person per lifetime.
Qualified family members include:
--> the Roth IRA investor
--> the Roth IRA investor's spouse
--> children of the Roth IRA investor
--> grandchildren of the Roth IRA investor
--> parent or ancestor of the Roth IRA investor
The law states that if your adjusted gross
income (AGI) is greater than $100,000, you cannot convert from a
traditional IRA to a Roth IRA. This law applies to both singles,
married filing joint & head of household filers. Note that if
you are filing a married-filing-separate tax return, you are not
eligible to convert a traditional IRA to a Roth IRA at all, no matter
what your adjusted gross income is. |
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