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The Economic Growth and Tax Relief Reconciliation Act of 2001 is now more than four years old. But the tax advantages created by this law, which continue to phase in, can help you make more progress toward retirement goals.The table below summarizes retirement plan contribution limits for 2005 and 2006.
| Provision
| For 2005
| For 2006
|
| Maximum contribution to a Traditional or Roth IRA
| $4,000
| $4,000
|
| Additional "catch-up" contribution to a Traditional or Roth IRA for those age 50 or older
| $500
| $1,000
|
| Maximum "elective deferral" to a 401(k), 403(b) or 457(b) plan
| $14,000
| $15,000
|
| Additional "catch-up" contribution to a 401(k), 403(b) or 457(b) plan for those age 50 or older
| $4,000
| $5,000
|
| Maximum "elective deferral" to a SIMPLE
| $10,000
| $10,000
|
| Additional "catch-up" to a SIMPLE for those age 50 or older
| $2,000
| $2,500
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You have until April 15, 2006 to make your IRA contribution (Traditional or Roth) for 2005, and you may make a 2006 contribution after December 31, 2005. For example, if you are age 50 or older you could set aside $4,500 for 2005 and $5000 for 2006.If you participate in a 401(k) plan at work, you may want to increase your salary reduction amounts for elective deferrals. Federal law allows a worker age 50 or older to defer up to $20,000 into a 401(k) in 2006, compared to $18,000 in 2005.
More Tax Changes That Can Help You Here are other tax law changes that will be in effect in 2006, all of which are favorable for taxpayers:
 | Inflation adjustments will widen federal tax brackets in 2006. Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.
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| The child credit will be $1,000 per child in 2006, as in 2005. You may claim full credits on your 1040 returns.
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| The maximum tax deduction allowed for college tuition payments is $4,000.
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| Beginning in 2006, the annual exclusion for gifts is raised to $12,000. The annual exclusion for gifts made in 2005 was $11,000. The "applicable exclusion amount" that keeps assets from being subject to the estate tax after the owner's death increases to $2.0 million in 2006. The top federal estate tax rate declines in 2006 to 46% from 47% in 2005.
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Apply Tax Savings to Retirement Plans You may want to apply your tax savings to make a larger retirement plan contribution. To maximize the tax-deferred compounding of earnings, there is no better time to make a contribution than early in the year.Any person who earns income (or is married to an earner) can contribute to a Traditional IRA. If either you or your spouse participates in a retirement plan at work, you may not be able to deduct all of your contribution to a Traditional IRA, depending on your income. However, you are free to make after-tax contributions to a Roth IRA, regardless of plan participation status, provided that your Adjusted Gross Income is not greater than:
| $160,000 for joint filers and head of household filers
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| $110,000 for single filers
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| $10,000 for a married person filing separately
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Even if you are not above that threshold, the contribution you can normally make is reduced if you are married filing separately, or if adjusted gross income is over $150,000 (filing jointly or head of household), or $95,000 for unmarried persons.Now is a good time to talk to your Financial Professional about ideas for making the most of retirement plan opportunities. You also may wish to consult a tax advisor for tax-related guidance.
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