Types of Retirement Plans With Contribution Limits
Retirement plans vary widely in their structure and in their contribution limits. The type of plan generally determines the contribution limit that will apply, but contribution caps can also be influenced by other factors, such as income, or classification as a highly paid employee.
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Qualified Defined Contribution Plans (DC Plans)
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Defined contribution plans include 401(k) plans, 403(b) plans, target benefit plans and profit sharing plans. Any plan that specifies the contribution into the plan, and does not specify the retirement benefit you may actually receive, is a defined contribution plan. Because money contributed to these plan goes untaxed until you withdraw it in retirement, federal law caps the amount you are allowed to contribute in any given year.
For example, the maximum amount of income an employee can contribute into a traditional 401(k), a 403(b) or a 457 plan for 2009 is $16,500, or $22,000 if the employee is 50 or older. The contribution caps do not include contributions that come from your employer, such as a match on your income contributions or a profit sharing contribution, but the sum of all of those amounts that may go into your defined contribution account in 2009 can not exceed $49,000.
Qualified Defined Benefit Plans (DB Plans)
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Defined benefit plans have much higher limits than defined contribution plans. Almost exclusively, contributions into the plan come from the employer, who agrees to provide a retirement pension that is defined by the terms of the plan. For that reason, employers retain control of the funds, unlike with a 401(k). However, instead of $49,000, you may accrue contribution benefits of up to $195,000 in 2009.
Simplified Employee Pensions (SEPs)
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Simplified Employee Pensions are also made up solely of employer contributions; employees may not contribute. However, SEPs are still individually held accounts and they are considered defined contribution plans, so the total contribution limit of $49,000 in 2009 applies.
SIMPLE Retirement Accounts
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SIMPLE plans are for small businesses with 100 or fewer employees. Under a SIMPLE plan, the employer establishes IRA's for eligible employees, who can then contribute a portion of their income to their individual IRA accounts. The contribution limits for employees age 49 or younger is $11,500 in 2009. For those age 50 and older, it is $14,000. In addition, the employer may be required to match contributions up to a certain percentage of pay.
Individual Retirement Accounts (IRAs)
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Individual Retirement Accounts, or IRAs, are offered through brokers, insurance companies, banks and asset management companies. If you are 49 and under, there is a $5,000 limit for contributions made in 2009. If you are age 50 or older, the limit is $6,000. Those who fall under certain income caps can contribute pre-tax money to an IRA even if they also contribute to a 401(k) or some other retirement plan at work. Those with higher incomes can also contribute to a personal IRA even if they are covered by a plan at work, but their contributions may be taxed.
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