Retirement Contribution Limits Largely Unchanged

You'll probably hate me for bringing this up so soon in the New Year, but it's time to begin planning for your 2011 taxes -- or at least, about the tax implications of your retirement account contributions.

For the second year in a row, one widely used inflation measurement, the Department of Labor's Consumer Price Index for Urban Consumers (CPI-U), remained flat for the quarter ending September 30, 2010, compared to the same period a year earlier. That's important to know because the IRS uses this measurement to determine whether dozens of tax-related numbers, such as the maximum amount you can contribute to a 401(k) plan, will stay the same or increase in the following tax year.

Bottom line: In 2011, most contribution levels will remain unchanged. That's bad news for those who had hoped to boost their tax-advantaged retirement savings this year. However, the good news is that more people are participating in 401(k) plans than ever before and contribution rates as a percentage of pay have gone up as well.

Here's an overview of what will and won't change with the more common retirement savings plans:

• Your plan may limit the percentage of pay you can contribute so, depending on your salary, your maximum contribution may actually be less. (For example, if the maximum contribution allowed is 10 percent of pay and you earn $50,000, you could only contribute $5,000.)
• Company-matching contributions do not count toward your maximum contribution.
• The annual limit for combined employee and employer contributions remains at $49,000.
• If you contribute pretax dollars your taxable income is reduced, which in turn lowers your current taxes. Then, your contributions and their investment earnings grow tax-free, until withdrawn -- at which point they'll be subject to the tax rate then in effect.
• With after-tax contributions, you pay income tax on the money now, but your contributions and their earnings will not be taxed at retirement.

• For singles/heads of households the phase-out range is $107,000 to $122,000 in AGI (up from $105,000 to $120,000 in 2010). Above $122,000, you cannot contribute to a Roth.
• For married couples filing jointly, it's $169,000 to $179,000 (up from $167,000 to $177,000).

• If you're single, a head of household, a qualifying widow(er) or married and neither spouse is covered by an employer-provided retirement plan, you can deduct the full IRA contribution, regardless of income.
• If you are covered by an employer plan and are single/head of household, the tax deduction phases out for AGI between $56,000 and $66,000 (unchanged from 2010); if married and filing jointly, it's $90,000 to $110,000 (up from $89,000 to$109,000 in 2010).
• If you're married and aren't covered by an employer plan but your spouse is, the IRA deduction is phased out if your combined AGI is between $169,000 and $179,000 (up from $167,000 to $177,000).
• For more details, visit this IRS website.

Defined benefit plan limits. The annual limit on how much you can receive from a traditional pension (defined benefit plan) remains at the 2010 level of $195,000.

SIMPLE plans. The employee contribution limit for these small-employer plans, which resemble 401(k) plans, remains at $11,500. Those over 50 can make up to $2,500 in catch-up contributions.

Simplified Employee Pension (SEP) IRA plans. In these plans, your employer (or you, if you're self-employed) contributes directly to an IRA on your behalf. The annual minimum wage for participation is $550 and the maximum contribution allowed is a percentage of pay (25 percent for companies; 20 percent if self-employed) up to an annual pay limit of $245,000 (same levels as 2010).

A final note: As an incentive to help low- and moderate-income workers save for retirement through an IRA or company-sponsored plan, many are eligible for a Retirement Savers' Tax Credit of up to $1,000 ($2,000 if filing jointly). This credit lowers your tax bill, dollar for dollar, in addition to any other tax deduction you already receive for your contribution.

Qualifying income ceiling limits for the Retirement Savers' Tax Credit increased in 2011 to $55,600 for joint filers, $42,375 for heads of household, and $28,250 for singles or married persons filing separately. Consult IRS Form 8880 for more information.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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