Retirement Plans

Retirement Plan Contributions

Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance, earlier, under Fringe Benefits.

If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture.

Elective deferrals. If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. It is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security and Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans. Cash or deferred arrangements (section 401(k) plans).

The Thrift Savings Plan for federal employees.

Salary reduction simplified employee pension plans (SARSEP).

Savings incentive match plans for employees (SIMPLE plans).

Tax-sheltered annuity plans (403(b) plans).

Section 501(c)(18)(D) plans.

Section 457 plans.

Overall limit on deferrals. For 2005, you generally should not have deferred more than a total of $14,000 of contributions to the plans listed in (1) through (6) above. You should not have deferred more than the lesser of your includible compensation or $14,000 of contributions to the plan listed in (7) above (section 457 plan).

Excess deferrals. Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit.

If you set aside more than the limit, the excess generally must be included in your income for that year. See Publication 525 for a discussion of the tax treatment of excess deferrals.

Catch-up contributions. You may be allowed catch-up contributions (additional elective deferral) if you are age 50 or older by the end of your tax year.

For more information, refer to Form 1040 Instructions, or Publication 17.

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