Tax changes in retirement plans for tax year 2007

Catch-Up Contributions if Employer Bankrupt

For 2007, if you participated in a 401(k) plan and the employer who maintained the plan filed for bankruptcy, you may be able to contribute an additional $3,000 to your IRA. For this to apply the following conditions must be met.
*You must have been a participant in a 401(k) plan under which the employer matched at least 50% of your contributions to the plan with stock of the company.
*You must have been a participant in the 401(k) plan 6 months before the employer filed for bankruptcy.
*The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.
*The employer (or any other person) must have been subject to indictment or conviction based on business transactions related to the bankruptcy.

If you choose to make these additional contributions, you cannot use the higher contribution and deduction limits for individuals who are age 50 or older.

Income Exclusion for Retired Public Safety Officer

For distributions in tax years beginning after 2006, you can elect to exclude from income an eligible retirement plan distribution if you are a retired public safety officer. The distribution must be from a governmental plan and must be transferred directly to pay premiums for accident or health insurance or qualified long-term care insurance for you, your spouse, or your dependents.

The maximum annual exclusion is $3,000.

You cannot deduct these premiums as medical expenses or, if you are self-employed, health insurance costs.

Modified AGI Limit for Traditional IRA Contributions Increased

For 2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:
*More than $83,000 but less than $103,000 for MFJ or a qualifying widow(er),
*More than $52,000 but less than $62,000 for a single or HH, or
*Less than $10,000 for MFS.

If you either live with your spouse at any time during 2007 or file a joint return for 2007; and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your AGI is more than $156,000 but less than $166,000.

Rollovers by Nonspouse Beneficiary

After 2006, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of a deceased employee. You must be the designated beneficiary of the employee, but you cannot be the surviving spouse. The distribution must be a direct trustee-to-trustee transfer to your IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA.

Modified AGI Limit for Retirement Savings Contribution Credit Increased

For 2007, you may be able to claim the retirement savings contribution credit if your modified adjusted gross income is not more than:
$52,000 if your filing status is MFJ,
$39,000 if your filing status is HH, or
$26,000 if your filing status is single, MFJ, or qualifying widow(er).

Rollover of Nontaxable Amounts

For tax years beginning after 2006, the nontaxable part of an eligible rollover distribution (such as after-tax contributions) from a qualified retirement plan can be rolled over to another qualified retirement plan or to an annuity contract described in section 403(b). Previously, this part of the distribution could be rolled over only to another qualified retirement plan that was a defined contribution plan.

The rollover must be a direct trustee-to-trustee transfer.

The plan to which the rollover is made must separately account for these contributions and the earnings on them.

Modified AGI Limit for Roth IRA Contribution Increased

For 2007, your Roth IRA contribution limit is reduced (phased out) in the following situations.
Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $156,000. You cannot make a Roth IRA contribution if your modified AGI is $166,000 or more.

Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution is your modified AGI is $10,000 or more.

Your filing situation is different than either of those described above and your modified AGI is at least $99,000. You cannot make a Roth IRA contribution is your modified AGI is $114,000 or more.

Qualified Plans

The following changes apply to qualified plans.

Limits on contributions and benefits. For 2007, the maximum annual benefit for a participant under a defined benefit plan has increased to the smaller of: $180,000, or 100% of the participant's average compensation for his or her highest 3 consecutive calendar years.

For 2007, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant has increased to the smaller of:
$45,000, or 100% of the compensation actually paid to the participant.

Compensation limit. For 2007, the maximum compensation used for figuring contributions and benefits has increased to $225,000.

Elective deferrals (401(k) plans). For 2007, the limit on elective deferrals (excluding catch-up contributions) for participants in 401(k) plans and SARSEPs (excluding SIMPLE plans) is $15,500.

Simplified Employee Pensions (SEPs)

The following changes apply to SEPs.

Elective deferrals (SARSEPs) limit. The limits on elective deferrals for participants in SARSEPs are discussed earlier under Elective deferrals (401(k) plans).

Deduction limit increased. The maximum deduction for contributions to a SEP remains unchanged at 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. However, for 2007, the maximum combined deduction for a participant's elective deferrals and other SEP contributions has increased to $45,000.

Contribution limit increased. For 2007, the annual limit on the amount of employer contributions to a SEP has increased to the smaller of: $45,000, or 25% of an eligible employee's compensation.

Compensation limit. For 2007, the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions has increased to $225,000.

SIMPLE Plans

The following change applies to SIMPLE plans.

Salary reduction contributions. For 2007, the limit on salary reduction contributions (excluding catch-up contributions) to a SIMPLE plan is $10,500.

403(b) Plans

The following changes apply to 403(b) plans.

Increase in the limit on elective deferrals. For 2007, the limit on elective deferrals (excluding catch-up contributions) has increased to $15,500.

Limit on annual additions. For 2007, the limit on annual additions has increased to $45,000.