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Retirement Plans - 2008 Update

January 2008

Business owners, professionals, and self-employed individuals can choose among several tax-sheltered retirement plans. In most of these plans, contributions are tax-deductible, investment income is untaxed, and withdrawals are taxable. Besides income tax, withdrawals are subject to a 10% penalty tax before age 59 ½. The penalty period ends at age 55, for those leaving a company.

Here are the most common retirement plans:

Traditional 401(k)s
Participants can make contributions of as much as 100% of their income, up to $15,500 in 2008, the same as in 2007. Those who are 50 or older can contribute up to $20,500. Many employers match some employee contributions.

Roth 401(k)s
A company that offers a traditional 401(k) can offer a Roth 401(k) as well. The contribution limits are the same, but there is no tax deduction. Participants can choose either version or split their contributions between the two. Overall, the $15,500 or $20,500 limits apply.

Why chose a non-deductible Roth 401(k)? Because all withdrawals are tax free after five years and after you reach age 59 ½. The younger you are and the lower your current tax rate, the more appealing a Roth 401(k) choice will be.

Profit-sharing plans
Here, employers make contributions to employees' accounts. The contribution, which can vary from year to year, may be up to 25% of each participant's compensation. In 2008, the contribution limit for any participant is $46,000.

Profit-sharing/401(k)plans
This combination includes salary deferrals by employees and contributions by employers. The total in 2008 can be as high as $46,000 for a participant, or $51,000 for employees who are at least 50 years old.

Solo 401(k)s
These plans permit self-employed individuals to duplicate a profit sharing/401(k) plan, with contributions up to $46,000 or $51,000 this year. Spouses who are on the payroll also can participate.

SIMPLE plans
Employees can defer some or all of their earned income, and employers must make a match. As the name suggests, paperwork is minimal. Limits are lower, though. Employees can contribute up to $10,500 in 2008, while those who are 50 or older can make a catch-up contribution of up to $2,500 and contribute up to $13,000.

The maximum contribution in 2008 is $23,500. That is a $10,500 regular contribution, a $2,500 catch-up contribution, and a $10,500 employer match. Because the employer match is limited to 3% of compensation per year, only participants earning $350,000 or more may get the maximum match.

Simplified Employee Pension (SEP) plans
These plans are even simpler than SIMPLE plans. They can be used by either self-employed individuals or employers. Either way, the maximum contribution this year is $46,000. What's more, you have until October 15, 2008 to make a tax-deductible contribution for 2007, when the upper limit was $45,000.

(Information provided courtesy of the AICPA)

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