On October 20, 2011, the Internal Revenue Service released details of changes affecting retirement savings for next year (IRS Announces Pension Plan Limitations for 2012, irs.gov). For the first time since 2009, inflation has risen enough to force a change in plan limits. How will this affect plans such as 401(k)s and IRAs?
Employee Contributions Rise From $16,500 to $17,000
An employee that uses elective deferrals to save into certain types of retirement plans will be able to save more in 2012 than in the last few years. The current limit of $16,500 will increase next year to $17,000. This will apply to plans such as 401(k)s, 403(b)s, the majority of 457s and to Thrift Savings Plans (TSPs).
There will not be, however, any rise in the limits governing catch-up contributions. These are available to people aged 50+ and are targeted at letting them contribute more money to add to retirement funds more quickly towards the end of their working lives. This limit stays at $5,500 in 2012.
How are IRAs and Roth IRAs Affected?
According to the IRS COLA increases table contributions ($5,000) and catch-ups ($1,000) will remain the same in 2012 as in 2011 for IRAs. If you make contributions to a traditional account and are covered by a workplace plan then you'll see some changes to the taxpayer deduction system. If you are single or the head of a household the new modified AGI (Adjusted Gross Income) phase-out will be set between $58-68,000. This sees a $2,000 increase on current figures which stand at $56-66,000.
Married couples filing jointly see the same level of increase rising from $90-110,000 in 2011 to $92-112,000 in 2012. Here, the spouse who contributes to the IRA has to be covered by a workplace retirement plan. If you aren't covered, are married to someone who is and do contribute to your own IRA, you'll also see a bigger increase in phase-out levels. In 2012 this will be raised to joint income of between $173-183,000 from the current range of $169-179,000.
There are also increases in the ranges for AGIs with Roth IRAs. Singles and heads of households will have income levels of between $110-125,000 for 2012, compared to $107-122,000 in 2011. Married couples filing jointly will move to between $173-183,000 (from $169-179,000) however married individuals filing separately will see no changes to the current range of $0-10,000.
Increases to Limits for The Saver's Credit for 2012
If you are eligible for the saver's credit, you'll also see an increase in the AGI limit next year. At the moment, singles and married individuals filing separately are given a limit of $28,250 – this will rise to $28,750 next year. Married couples filing jointly go up to $57,500 from $56,500 in 2011 and heads of households to $43,125 from $42,375.
Although money is tight in the the current climate, these changes are likely to be welcomed. Those who can afford to contribute more (and who are allowed to use full contribution ceilings by their employers) could see a useful boost in their savings for retirement. Those saving into IRAs and those who qualify for the saver's credit may benefit from better tax breaks
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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