401(k), IRA changes in store for savers in 2012
Good news for your retirement savings: New rules for 2012 could boost both how much you set aside and the tax breaks you'll earn.
For workers who put money in a 401(k) or similar retirement plan, such as the federal government's Thrift Savings Plan, the amount of money the IRS allows you to contribute will increase for the first time since 2009.
It's a $500 cost-of-living boost to $17,000.
Workers 50 and older can contribute an extra $5,500 to their 401(k). That cap will remain unchanged in 2012.
And remember, you pay no taxes on what you save or what you earn from your investments until you begin withdrawing money from your account.
This boost is likely to impact high wage earners only -- or savers who are really thrifty after setting aside money for retirement.
But beware caps that might be in place where you work on the percentage of your income you can put in a 401(k) plan; the ceiling might be lower than the IRS cap.
Meanwhile, if you put money into an individual retirement account, take note of some changes for 2012 here, as well.
Most savers will continue to be eligible to contribute $5,000 to their IRA ($6,000 for workers over 50), but the IRS will relax income limits on traditional IRAs that could allow more people to earn a tax break.
How much you make, and whether you participate in a 401(k) plan where you work, can reduce the amount of your contribution that can be deducted from your taxable income.
That's important because being able to deduct contributions and lower your current tax bill is a major benefit of traditional IRAs.
If you do contribute to a 401(k) plan, the income guidelines for deductibility depend on your tax-filing status.
For singles or heads of households, your 2012 contribution is:
- Fully deductible if what the IRS calls your "modified gross income" is $58,000 or less.
- Partially deductible if your income is between $58,000 and $68,000.
- Not deductible if your income is over $68,000.
The IRS increased each of those deduction limits by $2,000 over 2011.
For couples filing jointly, your contribution is:
- Fully deductible if your income is $92,000 or less.
- Partially deductible if your modified gross income is between $92,000 and $112,000.
- Not deductible if your income is over $112,000.
That's also up $2,000 over 2011.
Savers who do not contribute to a 401(k) plan at work must follow a different set of rules.
Your contribution is fully deductible, regardless of income, if you're single or a head of a household or married and filing jointly.
Married couples with one spouse participating in a 401(k) plan can:
- Deduct the full amount of their IRA contribution if their modified gross income is $173,000 or less.
- Partially deduct their contribution if their income is between $173,000 and $183,000.
- Deduct none of their contribution if their income is over $183,000.
That's a $4,000 increase over 2011.
The income limits have been relaxed for Roth IRAs, as well.
Remember, contributions to Roth IRAs are made with after-tax dollars, so none of it is tax deductible.
But allowable contributions decrease as income goes up.
If you're single or the head of a household, you can make a:
- Full contribution if your modified gross income is less than $110,000.
- Partial contribution for income between $110,000 and $125,000.
- No contribution if your income is over $125,000.
If you're married and filing jointly, you can make a:
- Full contribution for income up to $173,000.
- Partial contribution for income between $173,000 and $183,000.
- No contribution if your income is over $183,000.
That's a $3,000 increase over 2011.
Find more details on the rule changes on the IRS website.
If you're debating how much you need to contribute, our retirement calculator can help you set -- and achieve -- your savings goal.
But make sure to set something aside. Contributing to a 401(k) and IRA are two of our 10 secrets to saving successfully for retirement.