Tax Information: What Is Irs Section 415?

Take a look at IRS Section 415 to see if it applies to your own tax/financial situation.

When we imagine the Internal Revenue Service, we can't help but roll our eyes when we think of the hundreds of different numbered sections associated with it. There's a number for everything: IRS Sections 72, 691, 42 or 529. The list goes on and on. What exactly are the different sections, however? Most of them impact our taxes in some way or another and yet most of us couldn't tell a Section 42 from a Section 61. Today, let's explore one of those enigmatic sections: IRS Section 415.

In a nutshell, Section 415 is responsible for placing a monetary limitation on both contributions that can be given and benefits that can be provided within qualified retirement plans. A qualified retirement plan is defined as a plan that meets requirements established by the IRS Section 401(a), as well as ERISA, which is the Employee Retirement Income Security Act (1974). ERISA is the act that put legal guidelines in place for private pension plans. Qualified retirement plans are eligible for tax benefits. One of these benefits is that participants of this type of plan have their contributions and respective earnings on these contributions tax-deferred until the participant chooses to withdraw his/her money. Qualified retirement plans may include 401(k) plans, profit sharing plans or pension plans, all of which may be available through your employer.

Within Section 415, there are many types of special rules, especially concerning the job a qualified participant may have. For example, there are special rules for commercial airline pilots, those people participating within State and government plans and those with multi-employer and governmental plans. To find out more about whether these special rules may apply to your own situation, please consult your tax advisor, accountant or employer.

Year after year as the cost of living gets higher and higher due to inflation, the Internal Revenue Service adjusts the benefits and contributions accordingly to account for this. For example, this past year (2004), the limitation for a defined benefit plan's annual benefit increased 5,000 dollars from $160,000 to $165,000, while the limitation for those defined contribution plans also increased 1,000 dollars from $40,000 to $41,000. This cost of living adjustment is referred to as COLA (which appropriately enough, stands for Cost Of Living Adjustment). It is almost guaranteed that pension plan limitations will increase each year. This is because increases in the cost of living index usually meet the standards each year that will cause the adjustment to become necessary.

The act called EGTRRA (Economic Growth and Tax Relief Reconciliation Act) which was established in 2001, has also been responsible for increasing many of the previous year's limitations set, including this year's. Examples of how EGTRRA may affect limitations can be seen in its effects on elective deferrals to the Federal Government's Thrift Savings Plan and 401(k) plans. Again, as with anything tax-related, it is always to your benefit to consult your accountant or tax advisor to see whether or not these different IRS sections apply to your own personal financial situation.

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