Publication 553: 2003 Highlights of Tax Changes; 3. IRAs & Other Retirement Plans

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

For 2003, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $60,000 but less than $70,000 for a married couple filing a joint return or a qualifying widow(er),
More than $40,000 but less than $50,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range increased by $6,000. For more information, see How Much Can You Deduct? in chapter 1 of Publication 590.

For plan years beginning after 2002, a qualified plan (defined later) can maintain a separate account or annuity under the plan to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of a traditional IRA or Roth IRA, it is deemed a traditional IRA or Roth IRA. A deemed IRA is subject to IRA rules and not to qualified plan rules. Also, the deemed IRA and contributions to it are not taken into account in applying qualified plan rules to any other contributions under the plan. Voluntary employee contributions must be designated as such by employees covered under the plan. They are includible in income.

Qualified plan. For deemed IRA purposes, qualified plans are defined contribution plans, defined benefit plans, annuity plans described in section 403(a), 403(b) plans, or section 457 deferred compensation plans.

Amending the plan. If you want to provide a deemed IRA for your employees, you will have to amend your plan. For information on amending your plan, see Revenue Procedure 2003–13 in Internal Revenue Bulletin 2003–4.

Catch-up contributions. Beginning in 2003, participants in the TSP who are age 50 or over at the end of the year generally can make catch-up contributions to the plan. For 2003, the maximum catch-up contribution is $2,000. For 2004, the maximum increases to $3,000.

Increase in the limit on elective deferrals. For 2003, the limit on elective deferrals increased from $11,000 to $12,000. The limit on elective deferrals will increase by $1,000 each year through 2006.

Catch-up contributions. For 2003, if you were age 50 or older by the end of the year, you may be permitted to make additional catch-up contributions of up to $2,000 to your 403(b) plan.

More information. For more information about 403(b) plans, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).

The following changes apply to 401(k) plans. For more information, see Publication 560, Retirement Plans for Small Business.

Elective deferrals. The limit on elective deferrals for participants in 401(k) plans (excluding SIMPLE plans) is as follows.

Year	Limit
2003	$ 12,000
2004	13,000
2005	14,000
2006 and later years	15,000
Note. The $15,000 limit is subject to adjustment after 2006 for cost-of-living increases.

Catch-up contributions. A plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions, as follows.

Year	Catch-Up Limit
2003	$ 2,000
2004	3,000
2005	4,000
2006 and later years	5,000
Note. The $5,000 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

The catch-up contribution limit.
The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

The limit on elective deferrals and catch-up contributions discussed under 401(k) Plans also apply to SARSEP participants.

The following changes apply to SIMPLE plans. For more information, see Publication 560, Retirement Plans for Small Business.

Salary reduction contributions. The limit on salary reduction contributions to a SIMPLE plan is as follows.

Year	Limit
2003	$ 8,000
2004	9,000
2005 and later years	10,000
Note. The $10,000 limit is subject to adjustment after 2005 for cost-of-living increases.

Catch-up contributions. A SIMPLE plan can permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions, as follows.

Year	Catch-Up Limit
2003	$ 1,000
2004	1,500
2005	2,000
2006 and later years	2,500
Note. The $2,500 limit is subject to adjustment after 2006 for cost-of-living increases.

The catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

The catch-up contribution limit.
The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions.

For 2004, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $65,000 but less than $75,000 for a married couple filing a joint return or a qualifying widow(er),
More than $45,000 but less than $55,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range increase by $5,000. For more information, see How Much Can You Deduct? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs).

New Method for Figuring
Net Income On Returned or
Recharacterized IRA Contributions

There is a new method for figuring the net income on IRA contributions made after 2003 that are returned to you or recharacterized. See How Do You Recharacterize a Contribution? or Contributions Returned Before Due Date of Return in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs).

For figuring the net income on IRA contributions made during 2002 and 2003 that were returned to you or recharacterized, you can use the new method described in Publication 590, the method permitted by Notice 2000–39, or the method in the proposed regulations.

The following changes apply to qualified plans. For more information on qualified plans, see Publication 560, Retirement Plans for Small Business.

Limits on contributions and benefits increase. For 2004, the maximum annual benefit for a participant under a defined benefit plan increases to the lesser of the following amounts.

100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
$165,000 (subject to cost-of-living increases after 2004).

For 2004, a defined contribution plan's maximum annual contributions and other additions (excluding earnings) to the account of a participant increases to the lesser of the following amounts.

100% of the compensation actually paid to the participant.
$41,000 (subject to cost-of-living increases after 2004).

The following changes apply to SEPs. For more information on SEPs, see Publication 560, Retirement Plans for Small Business.

Deduction limit increases. The maximum deduction for contributions to a SEP for 2004 remains unchanged at 25% of the compensation paid or accrued during the year to your eligible employees participating in the plan. However, the maximum combined deduction for a participant's elective deferrals and other SEP contributions increases to $41,000.

Contribution limit Increases. For 2004, the annual limit on the amount of employer contributions to a SEP increases to the lesser of the following amounts.

25% of an eligible employee's compensation.
$41,000 (subject to cost of living adjustments after 2004).

Compensation limit increases. For 2004, the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions increases to $205,000.

Increase in the limit on elective deferrals. For 2004, the limit on elective deferrals increases from $12,000 to $13,000. The limit on elective deferrals will increase by $1,000 each year through 2006.

Increase in the limit on annual additions. For 2004, the limit on annual additions increases to the lesser of $41,000, or your includible compensation for your most recent year of service. In 2003 your limit on annual additions is the lesser of $40,000 or your includible compensation for your most recent year of service.

Catch-up contributions. For 2004, if you are age 50 or older by the end of the year, you may be permitted to make additional catch-up contributions of up to $3,000 to your 403(b) plan.

More information. For more information about 403(b) plans, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).

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