Contribution Limits to Tax Shelters and 401k Loan Limits

This post is meant to serve as a reference for contribution limits to the various tax shelters. Below are the yearly contribution limits for each type of account.

  • IRAs: in 2007 the limit is $4,000 – this rises to $5,000 in 2008 and increases yearly by $500 in the following years. This limit can be reached by a onetime contribution, or by consecutive contributions throughout the tax year. Employees over the age of 50 can make yearly contributions of $5,000 in 2007 and $6,000 in 2008 with the same $500 increment in following years.
  • 401k: in 2007 the limit is $15,500, this rises to $16,000 in 2008. Employees over the age of 50 can make additional “catch-up” contributions amounting to an additional $5,000. Additional limits may be imposed by your employer, typically at 10% of your annual salary.
  • 403b: same as 401k limits with the same incentives offered at age 50 and above. 403b plans are essentially 401k plans offered by non-profit organizations.
  • 457: same as 401k and 403b limits with the same incentives offered at age 50 and above. 457 plans are essentially 401k plans offered by governmental employers or non-church tax-exempt organizations.
  • Keogh: also the same contribution limits with the same age incentives as 401k, 403b, and 457 plans. Keogh plans are constructed for the self-employed or unincorporated firms.
  • SEP IRA: determined as 20% of total net income and limited to $45,000 in 2007, with subsequent contribution limits raised according to a cost-of-living increase. SEP IRAs are constructed specifically for sole proprietorships and small business owners, just as Keogh plans are.

Many employees choose to take out loans against their 401k plans. It has been estimated that about 20% of employees eligible for a plan loan have one. Generally, these loans are limited to 50% of the amount in the 401k account or at $50,000, whichever is the lesser amount. Loans are generally repaid through payroll deductions in monthly installments over a 5 year period, except in the case of a loan for a home mortgage when the loan can be extended over a longer period.

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