Publication 553 (3/2006), Highlights of 2005 Tax Changes

3. IRAs and Other Retirement Plans

Table of Contents

2005 Changes

Individual Retirement Arrangements (IRAs)

For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2005 has increased to the smaller of:

$4,000, or
Your taxable compensation for the year.

If you were age 50 or older in 2005, the most that can be contributed to your traditional IRA for 2005 is the smaller of:

$4,500, or
Your taxable compensation for the year.

Roth IRA contribution limit. If contributions on your behalf were made only to Roth IRAs, your contribution limit for 2005 is generally the smaller of:

$4,000, or
Your taxable compensation for the year.

If you were age 50 or older in 2005 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2005 is generally the smaller of:

$4,500, or
Your taxable compensation for the year.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced.

Modified AGI limit for traditional IRA contributions increased. For 2005, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced if your modified adjusted gross income (AGI) is:

More than $70,000 but less than $80,000 for a married couple filing a joint return or a qualifying widow(er),
More than $50,000 but less than $60,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range has increased by $5,000.

Increase in limit on salary reduction contributions under a SIMPLE IRA. For 2005, salary reduction contributions that your employer could make on your behalf under a SIMPLE IRA has increased to $10,000.

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older. For 2005, additional salary reduction contributions could be made to your SIMPLE IRA if:

You were age 50 or older in 2005, and
No other salary reduction contributions could be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

For 2005, the additional amount is the smaller of:

$2,000, or
Your compensation for the year reduced by your other elective deferrals for the year.

Modified AGI. Beginning in 2005, the domestic production activities deduction is added back to income when figuring modified AGI.

Modified AGI for conversion purposes. Beginning in 2005, modified AGI for conversion purposes will not include required distributions from qualified retirement plans (including IRAs).

Qualified Plans

The following changes apply to qualified plans. For more information, see Publication 560, Retirement Plans for Small Business.

Limits on contributions and benefits. For 2005, the maximum annual benefit for a participant under a defined benefit plan has increased to the smaller of:

100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or
$170,000.

For 2005, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant has increased to the smaller of:

100% of the compensation actually paid to the participant, or
$42,000.

Compensation limit. For 2005, the maximum compensation used for figuring contributions and benefits has increased to $210,000.

Elective deferrals (401(k) plans). For 2005, the limit on elective deferrals for participants in 401(k) plans and SARSEPs (excluding SIMPLE plans) is $14,000.

Catch-up contributions. For 2005, a plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions of up to $4,000.

The catch-up contribution a participant can make for a year cannot exceed the smaller of:

$4,000, or
The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

Simplified Employee Pensions (SEPs)

The following changes apply to SEPs. For more information, see Publication 560.

Elective deferral (SARSEPs) limit. The limits on elective deferrals and catch-up contributions for participants in SARSEPs are discussed earlier under Elective deferrals (401(k) plans).

Deduction limit increased. The maximum deduction for contributions to a SEP remains unchanged at 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. However, for 2005, the maximum combined deduction for a participant's elective deferrals and other SEP contributions has increased to $42,000.

Contribution limit increased. For 2005, the annual limit on the amount of employer contributions to a SEP has increased to the smaller of:

25% of an eligible employee's compensation, or
$42,000.

Compensation limit. For 2005, the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions has increased to $210,000.

SIMPLE Plans

The following changes apply to SIMPLE plans. For more information, see Publication 560.

Salary reduction contributions. For 2005, the limit on salary reduction contributions to a SIMPLE plan has increased to $10,000.

Catch-up contributions. For 2005, a SIMPLE plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions of up to $2,000.

The catch-up contribution a participant can make for a year cannot exceed the smaller of:

$2,000, or
The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.

403(b) Plan Changes

The following changes apply to 403(b) plans. For more information, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).

Increase in the limit on elective deferrals. For 2005, the limit on elective deferrals has increased to $14,000.

Catch-up contributions. If you are age 50 or older by the end of 2005, you may be permitted to make additional catch-up contributions of up to $4,000 to your 403(b) plan.

Limit on annual additions. For 2005, the limit on annual additions has increased to $42,000.

Catch-up Contributions to Thrift Savings Plan (TSP)

Participants in the TSP who are age 50 or older at the end of the year generally can make catch-up contributions to the plan. For 2005, the maximum catch-up contribution has increased to $4,000. For more information, see Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

2006 Changes

Individual Retirement Arrangements (IRAs)

For more information about IRAs, see Publication 590.

Traditional IRA contribution and deduction limit. If you will be age 50 or older in 2006, the most that can be contributed to your traditional IRA for 2006 will be the smaller of:

$5,000, or
Your taxable compensation for the year.

Roth IRA contribution limit. If you will be age 50 or older in 2006 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2006 will generally be the smaller of:

$5,000, or
Your taxable compensation for the year.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced.

Modified AGI limit for traditional IRA contributions increased for a married couple filing a joint return. For 2006, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $75,000 but less than $85,000 for a married couple filing a joint return or a qualifying widow(er),
More than $50,000 but less than $60,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

Additional salary reduction contributions to SIMPLE IRAs for persons age 50 or older. For 2006, additional salary reduction contributions can be made to your SIMPLE IRA if:

You will be age 50 or older in 2006, and
No other salary reduction contributions can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

For 2006, the additional amount is the smaller of:

$2,500, or
Your compensation for the year reduced by your other elective deferrals for the year.

Qualified Roth Contribution Programs

For tax years beginning after 2005, 401(k) and 403(b) plans can create a qualified Roth contribution program so that participants may elect to have part or all of their elective deferrals to the plan designated as after-tax Roth contributions.

Qualified Plans

The following changes apply to qualified plans. For more information, see Publication 560.

Limits on contributions and benefits. For 2006, the maximum annual benefit for a participant under a defined benefit plan has increased to the smaller of:

100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or
$175,000 (subject to cost-of-living increases).

For 2006, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant has increased to the smaller of:

100% of the compensation actually paid to the participant, or
$44,000 (subject to cost-of-living increases).

Compensation limit. For 2006, the maximum compensation used for figuring contributions and benefits has increased to $220,000.

Elective deferrals (401(k) plans). For 2006, the limit on elective deferrals for participants in 401(k) plans and SARSEPs (excluding SIMPLE plans) is $15,000.

Catch-up contributions. For 2006, a plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions of up to $5,000.

The catch-up contribution a participant can make for a year cannot exceed the smaller of:

$5,000, or
The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

Simplified Employee Pensions (SEPs)

The following changes apply to SEPs. For more information, see Publication 560.

Deduction limit increased. The maximum deduction for contributions to a SEP remains unchanged at 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. However, for 2006, the maximum combined deduction for a participant's elective deferrals and other SEP contributions has increased to $44,000.

Contribution limit increased. For 2006, the annual limit on the amount of employer contributions to a SEP has increased to the smaller of:

25% of an eligible employee's compensation, or
$44,000 (subject to cost-of-living increases).

Compensation limit. For 2006, the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions has increased to $220,000.

SIMPLE Plans

The following change applies to SIMPLE plans. For more information, see Publication 560.

Catch-up contributions. For 2006, a SIMPLE plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions up to $2,500.

403(b) Plan Changes

The following changes apply to 403(b) plans. For more information, see Publication 571.

Increase in the limit on elective deferrals. For 2006, the limit on elective deferrals has increased to $15,000.

Catch-up contributions. If you are age 50 or older by the end of 2006, you may be permitted to make additional catch-up contributions of up to $5,000 to your 403(b) plan.

Limit on annual additions. For 2006, the limit on annual additions has increased to $44,000.

Catch-up Contributions to Thrift Savings Plan (TSP)

Participants in the TSP who are age 50 or older at the end of the year generally can make catch-up contributions to the plan. For 2006, the maximum catch-up contribution has increased to $5,000. For more information, see Publication 721.