From the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®


(April 26, 2006) — Contributing to a retirement savings account remains one of the best ways to cut your tax bill and to help ensure a secure retirement. The Virginia Society of CPAs points out that there are a number of tax changes for 2006 that can help you to boost your retirement savings.

Increased contribution limits

Higher contribution limits for retirement plans will benefit many taxpayers in 2006. The maximum contribution limit for 401(k) retirement plans increases to $15,000 in 2006. The same contribution limit applies to 403(b) and 457 plans. Don’t forget that for 2006, taxpayers 50 years or older are also eligible to make an extra $5,000 catch-up contribution to a qualified retirement plan.

Not everyone has an employer-sponsored retirement plan. For those who don’t, there is the Individual Retirement Account (IRA). For both the traditional and Roth IRA, the 2006 contribution limit remains at $4,000, the same as 2005. However, the catch-up contribution is $1,000, up from $500 for 2005.

New Roth 401(k)

Starting in January of this year, employers were authorized to offer the Roth 401(k), a new retirement savings vehicle that combines features of the Roth IRA and the 401(k). With a Roth 401(k), contributions are made with after-tax dollars and your investment grows tax-free.

The key benefit of the Roth 401(k) is that money contributed, as well as earnings accumulated, can be withdrawn tax-free after age 59½, as long as the assets have remained in the plan for at least five years. You can contribute up to $15,000 in 2006 into a Roth 401(k). In addition, employees can contribute to a Roth 401(k) account, regardless of the amount of their income.

Employers are free to match employee Roth 401(k) contributions, with the employer’s match going into a regular 401(k).

Basically, employee contributions will have the Roth tax treatment — taxed when money is put into the plan and tax-free when taken out. Matching contributions will be treated like traditional 401(k) funds — not taxed going into the plan but taxed when withdrawn.

You can split your contributions between a traditional and Roth 401(k), but your total contribution to both accounts cannot exceed $15,000 in 2006 ($20,000 if you are age 50 or older).

With a Roth 401(k), distributions are required to begin once an employee reaches 70½. However, the plan’s assets can be rolled over into a Roth IRA, which does not require mandatory distributions (the IRS may close this apparent loophole).

It is expected that many employers will take a “wait and see” approach to offering this hybrid plan. Before opening a Roth 401(k), you should know that under current tax law, Roth 401(k)s will “sunset” or end in 2011. Unless Congress takes action to make permanent the provision for this plan, you would not be able to make any more contributions. You would, however, be allowed to keep the existing assets in the account.

Retirement Savings Credit

People with low to moderate income often find it hard to save for retirement. The Retirement Savings Contribution Credit, a temporary nonrefundable tax credit available for tax years 2002 through 2006 was designed to help and encourage these individuals to save for retirement. The credit applies to individuals with incomes up to $25,000 ($37,500 for a head of household) and married couples filing jointly with incomes up to $50,000.

The amount of the credit is based on an applicable percentage that is tied to your filing status and your adjusted gross income level. The percentage ranges from 50 percent to 10 percent of the individual’s eligible contribution of up to $2,000, allowing for a maximum credit of $1,000. The highest rate of 50 percent is reserved for taxpayers with the lowest income. Contributions to virtually all retirement accounts qualify for the credit.

The credit is a better deal than a deduction because it reduces your taxes on a dollar-for-dollar basis. What’s more, the credit is in addition to whatever other tax benefits may result from your contributions. For example, if you are eligible to deduct your IRA contribution, you may take both the deduction and the credit. One caveat: unless the law is extended, 2006 is the last year for this credit.

If you have any questions about these tax-saving retirement benefits, consult with a CPA.


The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at


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