Rollovers by nonspouse beneficiaries.  For distributions after December 31, 2006, nonspouse designated beneficiaries may be able to make direct trustee-to-trustee transfers from eligible retirement plans of deceased employees to IRAs set up to receive such transfers. The transfer will be treated as an eligible rollover distribution and the receiving IRA will be treated as an inherited IRA.

Rollover of after-tax contributions.  For tax years beginning after December 31, 2006, participants in a qualified plan or a section 403(b) plan can roll over after-tax contributions to another qualified plan or section 403(b) plan provided the rollover is made through a direct trustee-to-trustee transfer and the receiving plan separately accounts for the rollover.

Retirement savings contributions credit. The retirement savings contribution credit, originally set to terminate after December 31, 2006, was made permanent in the Pension Protection Act of 2006. For further information see Retirement savings contributions credit in Reminders.

Reporting requirements. Under the Pension Protection Act of 2006, the requirements for filing annual returns with respect to one-participant retirement plans have been modified to ensure that such plans (and any other plans of the employer) with total assets of $250,000 or less as of the close of the plan year beginning on or after January 1, 2007, will not have to file a return for that year upon meeting the five conditions under Reporting Requirements on page 19. Plans beginning on or before December 31, 2006, for which a Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, was required to be filed will not need to continue filing the Form 5500-EZ unless their total plan assets (for one or more one-participant plans, separately or together) exceed $250,000 at the close of the plan year beginning on or after January 1, 2007.

Compensation limit. For 2007, the maximum compensation used for figuring contributions and benefits increases to $225,000. This amount increases to $230,000 in 2008.

Elective deferrals. The limit on elective deferrals increases to $15,500 for tax years beginning in 2007 and remains the same for 2008. These new limits will apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), and deferred compensation plans of state or local governments and tax-exempt organizations. The contribution limits are subject to cost-of-living increases after 2008.

SIMPLE plan salary reduction contributions. The limit on salary reduction contributions is $10,500 for 2007 and 2008.

Catch-up contributions. A SIMPLE plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions. The catch-up contribution limit for 2007 and 2008 is $2,500 for each year. The limit is subject to cost-of-living increases after 2008. The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts.

Rollovers to Roth IRA. Beginning January 1, 2008, a distribution from a qualified retirement plan can be rolled over to a Roth IRA, subject to the restrictions that currently apply to a rollover from a traditional IRA to a Roth IRA. For additional information on rollovers, see Pub. 590, Individual Retirement Arrangements (IRAs).

Qualified reservist distributions. The additional 10% tax on early distributions does not apply to a qualified reservist distribution. A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be recontributed to an IRA.

Qualified Roth contribution program. For tax years beginning after December 31, 2005, your 401(k) plan may allow an employee to contribute to a qualified Roth contribution program. Under this program, an employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions.

Credit for startup costs. You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies.

The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year. To take the credit, get Form 8881, Credit for Small Employer Pension Plan Startup Costs, and the instructions.

User fee. The user fee for requesting a determination letter does not apply to certain requests made by employers who have 100 or fewer employees, at least one of whom is a non-highly compensated employee participating in the plan. See User fee under Setting Up a Qualified Plan in chapter 4.

Retirement savings contributions credit. Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contributions credit. The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50%, depending on the participant's adjusted gross income. The credit also depends on the participant's filing status. Form 8880, Credit for Qualified Retirement Savings Contributions, and the instructions explain how to claim the credit. In addition, the income limits for the credit are subject to indexing for inflation.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, “you” refers to the employer. See chapter 1 for the definition of the term employer and the definitions of other terms used in this publication. This publication covers the following types of retirement plans.

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free.