Retirement savings plans, such as employer-sponsored retirement plans, are important vehicles not only for retirement planning but for saving on taxes. A fundamental way that you can keep up with inflation is to maximize the pre-tax dollars that you put away in a retirement account (or accounts) each year. The maximum amount changes every year, as the result of new tax legislation or through inflation adjustments the IRS is required to make before the start of the year.

The IRS recently announced the 2008 cost-of-living adjustments (COLAs) for employer-sponsored retirement plans, traditional and Roth IRAs, fringe benefit plans, and the retirement savings contribution credit. A COLA is an annual adjustment to retirement benefits.

The following are key inflation-adjusted amounts for 2008, effective January 1, 2008:

• The limit on annual benefits under a defined benefit plan increases from $180,000 to $185,000;
• The maximum annual limit on elective deferrals for 401(k) plans, 403(b) plans, certain 457 plans, and the federal government’s Thrift Savings Plan remains at $15,500;
• The limit on elective contributions to SIMPLE retirement accounts remains at $10,500;
• The limits on catch-up contributions to employer plans remain at $5,000 and $2,500;
• The compensation amount for simplified employee pension plans (SEPs) remains at $500;
• The dollar limit in defining a “key employee” in a top-heavy plan increases from $145,000 to $150,000;
• The limit on contributions to traditional and Roth IRAs is set by statute at $5,000, plus $1,000 in catch-up contributions for individuals aged 50 or over; and
• The annual compensation limit in evaluating the extent of certain allowable contributions and benefits under a variety of tax qualified plans increases from $225,000 to $230,000.

(IR-2007-172)