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Retirement Plan Limits Increase in 2013

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Benjamin Franklin once declared, "Nothing can be said to be certain, except death and taxes." Although I don't have any updates on the former, where taxes are concerned I do have news:

As it does every year, the Internal Revenue Service announced 2013 cost-of-living adjustments to many of the amounts you and your employer can contribute toward your retirement accounts. These new limits mean most people will be able to contribute more money in tax-advantaged accounts for their retirement savings.

Here are highlights of what will and won't change in 2013:

Defined contribution plans. The maximum allowable annual contribution you can make to workplace 401(k), 403(b), 457(b) and federal Thrift Savings plans increases by $500 to $17,500. Keep in mind these additional factors:
  • People over 50 can also make an additional $5,500 in catch-up contributions (unchanged from 2012).
  • The annual limit for combined employee and employer contributions increased by $1,000 to $51,000.
  • Because your plan may limit the percentage of pay you can contribute, your maximum contribution may actually be less. (For example, if the maximum contribution is 10 percent of pay and you earn $50,000, you could only contribute $5,000.)
Individual Retirement Accounts (IRAs). The maximum annual contribution to IRAs increases by $500 to $5,500 (plus an additional $1,000 if 50 or older -- unchanged from 2012). Maximum contributions to traditional IRAs are not impacted by personal income, but if your modified adjusted gross income (AGI) exceeds certain limits, the maximum amount you can contribute to a Roth IRA gradually phases out:
  • For singles/heads of households the phase-out range is $112,000 to $127,000 (increased from $110,000 to $125,000 in 2012). Above $127,000, you cannot contribute to a Roth.
  • For married couples filing jointly, the range is $178,000 to $188,000 (up from $173,000 to $183,000 in 2012).
  • For a married person filing a separate return who is covered by a retirement plan at work, the phase-out range remains at $0 to $10,000.
Keep in mind these rules for deducting traditional IRA contributions on your federal tax return:
  • 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 or a head of household, the tax deduction phases out for AGI between $59,000 and $69,000 (up from $58,000 to $68,000 in 2012); if married and filing jointly, the phase-out range is $95,000 to $115,000 (up from $92,000 to $112,000 in 2012).
  • 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 $178,000 and $188,000 (up from $173,000 to $183,000 in 2012).
  • For more details, read IRS Publication 590.

Defined benefit plan limits. The limit on the maximum annual benefit you can receive from a defined benefit plan -- a traditional pension -- increases by $5,000 to $205,000.

SIMPLE plans. The employee contribution limit for these small-employer plans, which resemble 401(k) plans, increased by $500 to $12,000. 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 self-employed) contributes directly to an IRA on your behalf. The annual minimum wage for participation remains unchanged at $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 $255,000 (a $5,000 increase from 2012).

Retirement Saver' Tax Credit. 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 2012 to $59,000 for joint filers, $44,250 for heads of household, and $29,500 for singles or married persons filing separately. Consult IRS Form 8880 for more information.

A few other noteworthy tax-related numbers that change in 2013 include:
  • The Social Security taxable wage base is increasing to $113,700, up from $110,100 in 2012. This is the maximum income amount subject to Social Security taxes.
  • The gift exemption amount increases by $1,000 to $14,000.
  • The amount used to reduce the net unearned income reported on a child's tax return subject to the so-called "kiddie tax" increases by $500 to $1,000.

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.