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New 401(k) Contribution Limits Take Effect for 2003
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By Clifton Linton
Senior Writer, mPower |
Thanks to new limits that took effect Jan. 1, Uncle Sam
will let you save more in your 401(k) plan in 2003.
One of the nice provisions of the 2001 tax bill is the one
that regularly raises some 401(k) contribution limits.
More good news: according to a different set of rules, more
401(k) participants may be able to deduct their IRA contributions due to new, higher
income limits that also took effect.
Here's a look at some of the changes and key limits
effective in 2003.
401(k) Limits
Following are federal limits on how much you can save in a
401(k) plan. Individual plans may impose stricter limits for various reasons; check with
your employer to find out the rules for your specific plan.
| 401(k) Limits for 2002
and 2003 |
| Type of limit |
2002 |
2003 |
| Maximum individual pretax contribution limit |
$11,000 |
$12,000 |
| Age-50 catch-up contribution limit (available to workers
who are 50 or older in 2003)* |
$1,000 |
$2,000 |
| SIMPLE 401(k) maximum individual pretax contribution limit
|
$7,000 |
$8,000 |
| SIMPLE 401(k) age-50 catch-up contribution limit |
$500 |
$1,000 |
| Percent-of-pay limit -- total 401(k) employee and employer
contributions may not exceed: |
the lesser of 100 percent of pay or $40,000 |
the lesser of 100 percent of pay or $40,000 |
| Highly compensated employee income threshold |
$90,000 |
$90,000 |
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* Your employer must amend its 401(k) plan to allow this
type of contribution before you can make it. Employers are not required to allow these
contributions.
Traditional IRA Limits
Anyone may contribute to an IRA; the question is whether
the contribution is tax-deductible. For many folks who participate in a retirement plan at
work, it is not. The reason is that your ability to deduct a traditional IRA contribution
depends on two factors:
- whether you were an active participant in a retirement
savings plan, such as a 401(k), 403(b) or 457(b) plan, at work
- your modified adjusted gross income (MAGI) and filing
status. (IRS Publication 590, Individual Retirement Arrangements (IRAs) contains a
worksheet you can use to calculate your MAGI.)
Even if you only contribute one dollar, or if your employer
makes a contribution on your behalf, you are considered a participant in the plan and your
ability to make a tax-deductible IRA contribution depends on your income and filing
status.
You may make a fully deductible traditional IRA
contribution if you:
- file as single, or head of household, and are not covered by
a plan at work, or
- file as married filing jointly and neither you nor your
spouse are active participants in a plan at work.
Your W-2 should show if you were covered by a plan. If you
are unsure, check with your employer.
The 2003 limits for taxpayers who are single or married
filing jointly are $6,000 dollars higher than the 2002 limits. Here's how the new limits
work:
If you participate in a defined contribution plan at work,
your traditional IRA contribution will be fully deductible if you are:
- Single with a MAGI less than $40,000;
- Married filing jointly with a MAGI less than $60,000; or
- Married filing separately and have no MAGI.
If you participate in a plan at work, your traditional IRA
contribution will not be deductible at all if you are:
- Single with a MAGI of $50,000 or greater;
- Married filing jointly with a MAGI of $70,000 or greater; or
- Married filing separately with a MAGI of $10,000 or greater.
If you participate in a plan at work, your traditional IRA
contribution will be partially deductible if you are:
- Single with a MAGI of $40,000 to $49,999
- Married filing jointly with a MAGI of $60,000 to $69,999; or
- Married filing separately with a MAGI between $0 and $9,999.
(IRS Publication 590 contains a worksheet you can use to
calculate what portion of your contribution is deductible.)
So, if you are single and have a MAGI of $39,000 in 2003,
you will be able to fully deduct a traditional IRA contribution of $3,000 from your
taxable income. If your status is married filing jointly, and you have a MAGI of $68,000,
you can only deduct a portion of a traditional IRA contribution.
If one spouse is covered by a retirement plan at work, but
the other isn't, higher limits apply to the spouse who isn't covered if the couple is
married filing jointly. These limits are the same in 2003 as they were in 2002, and are as
follows:
- MAGI of $149,999 or less - the traditional IRA contribution
for the non-covered spouse is fully deductible
- MAGI of $150,000 to $159,999 -- the traditional IRA
contribution for the non-covered spouse is partially deductible
- MAGI of $160,000 or more -- the traditional IRA contribution
for the non-covered spouse is not deductible.
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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premier online community resource for 401(k) participants
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