For the first time since 2009, the IRS has increased the amount people can contribute to their 401(k) and other defined contribution plans. Effective Jan. 1, 2012, the maximum annual contribution grows by $500 to $17,000, thanks to an increase in the Department of Labor's Consumer Price Index for Urban Consumers (CPI-U), a common measure of inflation the IRS uses to determine whether or not to increase dozens of tax-related numbers from year to year.
That's good news for people who want to boost their tax-advantaged retirement savings but have been unable to in recent years.
Here's an overview of what will and won't change in 2012 with the more common retirement savings plans:Defined contribution plans. In addition to increasing the maximum allowable annual contribution to 401(k), 403(b), 457(b) and federal Thrift Savings plans to $17,000, these additional factors apply:
- People over 50 can also make an additional $5,500 in catch-up contributions (unchanged from 2011).
- The annual limit for combined employee and employer contributions increased by $1,000 to $50,000.
- 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.)
- Company-matching contributions do not count toward your maximum contribution.
- For singles/heads of households the phase-out range is $110,000 to $125,000 (up from $107,000 to $122,000 in 2011). Above $125,000, you cannot contribute to a Roth.
- For married couples filing jointly, it's $173,000 to$183,000 (up from $169,000 to $179,000 in 2011).
- 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 $58,000 and $68,000 (up from $56,000 to $66,000 in 2011); if married and filing jointly, the phase-out range is $92,000 to $112,000 (up from $90,000 to $110,000 in 2011).
- 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 $173,000 and $183,000 (up from $169,000 to $179,000 in 2011).
- For more details, read IRS Publication 590.
Defined benefit plan limits. The annual limit on the maximum annual benefit you can receive from a traditional pension (defined benefit plan) increases by $5,000 to $200,000.
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 self-employed) contributes directly to an IRA on your behalf. The annual minimum wage for participation remains 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 $250,000 (a $5,000 increase from 2011).
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 2011 to $57,500 for joint filers, $43,125 for heads of household, and $28,750 for singles or married persons filing separately. Consult IRS Form 8880 for more information.A few other noteworthy tax-related numbers that change in 2012 include:
- The Social Security taxable wage base is increasing to $110,100 in 2012, up from $106,800 in 2011. This is the maximum income amount subject to Social Security taxes.
- The value of each personal and dependent exemption available to most taxpayers on their federal income taxes increases by $100 to $3,800.
- The new standard deduction for single taxpayers/married filing separately increases $150 to $5,950; for heads of household it increases $200 to $8,700; and for married couples filing jointly, it increases $300 to $11,900.
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 adviser for specific information on how certain laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to Practical Money Skills.