Net Gains: Retire With a Larger Nest Egg
The contribution limits on IRAs went up this year. Learn how this affects you.
Jan. 16, 2008 — -- Saving for retirement got a bit easier two weeks ago.
New IRA contribution limits that took effect Jan. 1 allow individuals to set aside an extra $1,000 a year in traditional and Roth IRAs. That brings the annual limits to $5,000 for anyone under age 50 and $6,000 for those 50 and over.
An extra $1,000 a year might not sound like a big deal, but for a 40-year-old planning to retire at 65, it could mean an extra $79,000 available at retirement, assuming their IRA investments average an 8 percent annual return.
The new limits are the last big step up in IRA limits brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001. When that legislation passed Congress in May 2001, the maximum anyone could contribute to an IRA was $2,000.
EGTRRA, as the 2001 act is referred to in tax circles, established a timetable for increasing maximum IRA contributions in three, $1,000 increments, with future increases indexed to inflation. It also created catch-up contributions for individuals 50 and over. The catch-up contribution limit remains unchanged at $1,000 a year.
The higher limits had been set to expire in 2010, but the Pension Protection Act of 2006 made permanent the higher contributions to IRAs, 401(k) plans and other retirement savings plans.
Be aware the contributions limits for most other retirement savings plans -- 401(k), 403(b), 457 and SIMPLE IRA -- are not increasing this year. They are already tied to inflation. One other plan type into which higher contributions will be allowed this year is the SEP IRA. The maximum employer's contribution to a SEP -- used primarily by self-employed individuals -- is $46,000 this year, up $1,000 from last year.
What do the higher IRA contribution limits mean for retirement savers?
It means now is the time to adjust how much you direct to your IRA on a monthly or quarterly basis. If you are someone who contributes the maximum amount through a monthly automatic investment plant, you can add an extra $83.33 to your monthly contribution.
