The effective date for several significant changes in retirement planning contribution options is January 1, 2006. To take full advantage of the new tax laws, you must take action. I have put together a short and sweet summary of what most employees should be doing now for their retirement plans and Roth IRAs.

1. Always contribute the maximum amount to your retirement plan that your employer is willing to match.
2. If your adjusted gross income is under $150,000, make your 2006 Roth IRA contribution of $4,000 per spouse under age 50 or $5,000 per spouse over age 50 (due April 15, 2007).
3. On January 1, you may make your 2007 Roth IRA contributions (due April 15, 2008, but early contributions allow an additional 14 months of tax-free growth). 
4. Take advantage of the increases in maximum retirement plan contribution limits.*  Participants in 401(k), 403(b) and 457 plans meeting income criteria will be able to defer $15,000 in 2006 if they are under age 50 and are able to defer $20,000 if they are are 50 or older by year end.
5. If your employer has adopted the new Roth deferral feature now permitted for 401(k), 403(b) and 457 plans, consider designating your deferral to the Roth IRA portion of these plans. Since there are no income limitations, even taxpayers earning over $150,000 can participate.

*These increases are not automatic.  You must make a specific request to your benefits office or employer that your retirement plan contribution be increased to the new maximum allowable contribution limit.  Just because you have always “maxed out” your retirement plan contributions does not mean that your contribution limit will be increased automatically.

Of course these short suggestions are only the tip of the iceberg for tax-savvy action points that taxpayers should be considering for the New Year.  For a more complete discussion of these and other tax planning ideas, please see our most recent year-end tax planning article, Year-End Tax Tips for 2005 plus a Sneak Preview of the New Roth 401(k).

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