By Jack Gordon

You probably know that your 401(k) or IRA comes with a set of annual contribution limits. But do you know how they were established? The answer is the Economic Growth and Tax Relief Reconciliation Act. What is important to know about this law is this: It currently includes a sunset provision dictating that in the 2009 to 2010 time frame, everything from retirement account contribution limits to estate tax rates revert back to 2003 levels.

On the one hand, Congress appears more likely to revise the law than to let it expire, says Dennis DeGidio, a Thrivent Financial senior advanced markets consultant. “They’re discussing it right now,” he points out, “so anything we say about what will happen is hypothetical.” On the other hand, certain windows of opportunity now open may narrow or slam shut after 2010.

One such opportunity, DeGidio says, has to do with contribution limits to tax-deferred retirement accounts such as an IRA or 401(k). Right now, the maximum annual contribution to a traditional IRA is $4,000; it’s $5,000 if you’re 50 or older, thanks to a catch-up provision also due to expire after 2010. For a 401(k), the maximum is $15,000, or $20,000 for people 50 and older.

In five years (counting 2006), those limits will drop back to $2,000 for an IRA and $10,500 for a 401(k), with no catch-up provisions. To prudent people, DeGidio suggests, that is a call to wake up and sock it away while the sun still shines.

This is a classic “spend it now or spend it later” question. What do you give up to make the extra contribution? If you’re in a 20 percent tax bracket, you give up about $1,600 per year in spendable income to put the extra $2,000 in the IRA (you would have paid $400 in taxes if you didn’t contribute).

DeGidio does the math to prove it. For example, suppose you are 30, and just for the next three years (never mind five), you stuff $4,000, instead of $2,000, into an IRA. If your IRA account earns interest at 7 percent, the value of your extra contributions at the end of three years is $6,655. Time is your friend, so leave that money in the account at an average 7 percent, and by the time you are 65, it will have turned into $62,000.

“Maybe you want to put the extra into an IRA and hold off on buying a new car,” DeGidio suggests.

Or suppose you are 56 and have a 401(k) account. Fortunately, you’re able to take full advantage of the catch-up provision and contribute $20,000 instead of $15,000 each year for the next five years. If you can afford to do this, DeGidio says, you’re probably in a 30 percent tax bracket. You’ll give up about $3,500 per year in spendable income to put the extra $5,000 in the 401(k)—you would have paid $1,500 in taxes if you didn’t contribute. With a 7 percent return, that extra $25,000 you saved in catch-up contributions will have grown to $54,842 when you reach age 70.

Your Thrivent Financial representative has a calculator with your name on it.