New retirement plan contribution limits boost savings potential

In this era of big-box discount stores, it's practically a badge of honor not to pay full price for anything. A similar philosophy reigns when it comes to paying taxes: Yes, we should all shoulder our fair share, but overpay? No way.

One good way to lower your tax bill is to take advantage of favorable annual IRS tax code changes, such as cost-of-living adjustments to various personal exemption amounts, allowable tax deductions and rising income limits for retirement savings plan contributions.

Here are a few 2008 tax code amounts to keep in mind:

Defined contribution plan limits. After regularly increasing since 2001, the maximum individual contribution for 401(k), 403(b) and 457 plans remains unchanged at $15,500. If you're over age 50 you can also contribute up to another $5,000 per year. The annual limit for combined employee and employer contributions to these plans rises from $45,000 to $46,000 in 2008.

Remember, making pretax contributions to these plans reduces your taxable income, which in turn lowers your taxes. To learn more about how 401(k) plans work, go to Practical Money Skills for Life, a free personal financial management site created by Visa USA (www.practicalmoneyskills.com/benefits).

Defined benefit plan limits. The annual limit on how much employees can receive from a defined benefit (pension) plan increases from $180,000 to $185,000 in 2008.

Individual Retirement Accounts (IRAs). The maximum amount you can contribute to a regular or Roth IRA increases from $4,000 to $5,000 in 2008 (and from $5,000 to $6,000 for those aged 50 and older).

Savers credit. Low- and moderate-income workers who contribute to an IRA or company-sponsored plan may be eligible for an additional savers credit of up to $1,000 ($2,000 if filing jointly). Qualifying income ceiling limits rise to $53,000 for joint filers, $39,750 for heads of household, and $26,500 for singles or married persons filing separately. Read Form 8880 at www.irs.gov for more information.

SIMPLE plan contributions. The employee contribution limit for these small-employer plans, which resemble 401(k) plans, remains unchanged at $10,500. Maximum catch-up contributions for those over age 50 remain at $2,500.

Simplified Employee Pension (SEP) IRA plans. In these plans, your employer (or you, if self-employed) contributes directly to an IRA on your behalf. The annual minimum wage you must earn to participate remains at $500, the 2007 level. The maximum contribution allowed is a percentage of pay (25 percent if the company is incorporated; 20 percent if not) up to an annual pay limit of $230,000 - a $5,000 increase from 2007.

College tax credit. You may be able to claim a Hope credit of up to $1,800 (increased from $1,650 in 2007) for qualified education expenses paid for each eligible student during their first two years of post-secondary education. Read Publication 970 at www.irs.gov for details.

Social Security wage base. The maximum earnings amount subject to Social Security tax has increased to $102,000, from $97,500 in 2007.

Reexamine your filing status options each year, particularly if your income or living situation has changed. And, if you held two or more jobs during the year, make sure you haven't overpaid Social Security. As always, consult a financial advisor for your particular situation.

Be a wise consumer when it comes to paying your taxes: You'll have more money to save for your future - or to spend on the things you want.