HOW MUCH MONEY CAN AN EMPLOYEE CONTRIBUTE TO THESE PLANS ANNUALLY?
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Employer retirement plans enable you to invest a large portion of your compensation each year into a tax-deferred account, where your money can continue to grow in the tax-sheltered account. Your employer sometimes can also contribute to this account.
The Internal Revenue Code specifies different maximum annual contributions for both employees and employers. Here are the maximum allowable contributions for employees:
- If you participate in a 401(k) or 403(b) plan, you may elect to contribute up to the smaller of $14,000 or 100 percent of your compensation. In 2006, the maximum contribution will increase to $15,000. That figure will be adjusted for inflation each year thereafter. The law now allows an additional, "catch-up" contribution each year by plan participants age 50 and above. By 2006, participants over age 50 will be able to contribute a maximum of $20,000 to their plan accounts.
- If your employer offers a SIMPLE-IRA and you do not participate in other employer plans, you may contribute a maximum of $10,000 in 2005. The 2001 law also allows taxpayers age 50 and above to make the "catch-up" contribution each year—allowing up to $12,500 per year for 2006 and beyond. These amounts are subject to annual adjustment for inflation.
- If you participate in a SEP-IRA plan created after 1996, your employer—but not you—may make contributions to your plan. Pre-1997 SEPs, however, can continue to accept contributions, in the form of employee salary reductions of up to $14,000 (indexed for inflation). The total contribution allowed to a SEP-IRA for 2005 will increase to the lesser of $42,000 or 100 percent of compensation actually paid.
- If you participate in a Keogh plan, you generally may not make contributions in addition to those made by your employer.
Keeping track of your allowable contributions enables you to take full advantage of your employer retirement plan benefits.
But what about your employer? Can your employer contribute more or less than your own contributions to your retirement plan? And when does your employer match your own contributions to your retirement plan? The next section addresses these questions.