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Permanent Increase in Contribution Limits

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The Pension Protection Act of 2006 makes increased contribution limits for 401(k) plans and IRAs permanent.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which, among other things, increased the contribution limits to 401(k) and 403(b) plans and Individual Retirement Accounts.

In 2001, the maximum individual contribution to an employer sponsored 401(k) or 403(b) plan was $10,500, but EGTRRA increased that limit for future years. For the year 2006, an employee may put as much as $15,000 into the plan thereby reducing the employee’s income for tax purposes.  The contribution limits are indexed to increase in $500 increments every year. Additionally there is a catch-up contribution for employees who are over age 50.  They may contribute an extra $5,000 for the 2006 plan year, and the catch-up amount is indexed to increase every year.

EGTRRA also increased the limits for regular and Roth IRAs.  Before the change in law the maximum contribution to any IRA was the lesser of $2,000 or 100% of compensation.  EGTRRA increased the IRA contribution limits to $3,000 for 2002-2004, to $4,000 for 2005-2007, and $5,000 for 2008.  The limits will continue increasing under an indexing schedule.  The Act also introduced a “catch-up” contribution for individuals over age 50, so that they may put even more money away into savings.  From 2002 through 2005 this additional catch-up amount was $500, and beyond 2005 the catch-up amount is $1,000.

The provisions in EGTRRA were scheduled to expire at the end of 2010. At that time the contribution limits would have returned to the 2001 amounts.

The Pension Protection Act of 2006 makes the increased limits permanent. The bill also permanently establishes Roth 401(k) plans which are a new kind of retirement savings arrangement provided by employers.

Read Section 811 of the Pension Protection Act of 2006 Public Law 109-280

To read more about the Roth 401(k) see the PRC fact sheet.

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