Contribution limits rise for 2012

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The IRS yesterday announced changes in cost-of-living adjustments that will affect how much we can contribute to our workplace retirement plans next year.

Actually, it won’t affect most people since most people don’t contribute up to the limit. In fact, according to a LIMRA survey released earlier this week, 55 percent of adults don’t contribute at all to an employer-sponsored plan. Among those that do contribute to a plan, 48 percent contribute less than 5 percent of their earnings. Last week I wrote about similarly dismal figures released by EBRI.

Nevertheless, beginning next year, those among us who are disciplined enough to save the maximum possible can increase the amount we contribute to workplace plans by $500. (I confess that, despite my awareness of retirement planning issues, I don’t contribute up to the max. I’d have to adopt a monastic lifestyle.)

A summary follows of the changes impacting retirement contributions for the 2012 tax year, courtesy of the IRS:

• Employee contribution limits for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increased from $16,500 in 2011 to $17,000.

• The most that can be contributed to a plan participant’s account in 2012 is the lesser of their earnings or $50,000 (up from $49,000 in 2011). This includes employee and employer contributions as well as forfeitures allocated to their accounts. (Forfeitures generally refer to employer contributions made on behalf of employees who left the firm prior to being vested in the plan.)

• Catch-up contributions for taxpayers of age 50 or better remain the same at $5,500.

• SIMPLE contribution limits and SIMPLE catch-up contributions remain the same as last year at $11,500 and $2,500, respectively.

• IRA contribution limits of $5,000 (plus $1,000 catch-up contributions for those 50 and older) remain unchanged from 2011.

• For singles and heads of household who are covered by a workplace retirement plan and also contribute to a traditional IRA, the deduction is phased out for those with an adjusted gross income, or AGI, of between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.

• For married couples filing jointly in which a spouse is covered by an employer plan and contributes to an IRA, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000 in 2011.

• For a married-filing-jointly partner who is not covered by an employer plan (but whose spouse is), the deduction is phased out for an AGI of $173,000 to $183,000, up from $169,000 to $179,000.

• Roth IRA income phase-out ranges increased. Singles and heads of household can make a full Roth contribution if their AGI is less than $110,000; their contribution will be limited if they make up to $125,000. Those with incomes higher than $125,000 can’t make a Roth contribution. In 2011, the income phase-out range was $107,000 to $122,000.

• For married couples filing jointly, the Roth IRA income phase-out range in 2012 is $173,000 to $183,000, up from $169,000 to $179,000 in 2011. For married individuals covered by a workplace plan and filing separate returns, the phase-out range stays the same at $0 to $10,000.

• The AGI limit for those who qualify for the saver’s credit is $57,500 for married couples filing jointly; $43,125 for heads of household and $28,750 for single and married taxpayers filing separately. These represent increases of $1,000, $750 and $500, respectively, from 2011.

Will you increase your retirement contributions next year?

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Written by
Barbara Whelehan
Contributing writer
Barbara Whelehan is a contributing writer for Bankrate. Barbara writes about a range of subjects, including homebuying, real estate, retirement, taxes and banking.