2012 tax changes may aid retirement savings
January 06, 2012
New tax rules will allow savers to add higher amounts to their retirement accounts in 2012. The revised IRS regulations expand the amount that individuals can contribute to their 401(k) retirement plans, and additional changes will allow more taxpayers to make contributions to an IRA. The IRS has also expanded eligibility for the saver's credit.
Contribution limits rise for workplace retirement plans
Workers who contribute to a 401(k), 403(b) or federal Thrift Savings Plan can increase their contributions by $500 in 2012. While employees were limited to contributing $16,500 to their workplace retirement plans in 2011, the contribution limit will be $17,000 this year. Older workers -- those who are least 50 -- can also make "catch-up" contributions of an additional $5,500 per year.
The increased limit comes at a time when some employers are beginning to once again match employee 401(k) contributions. According to Towers Watson, a professional services company, approximately 75 percent of companies who suspended their 401(k) matching programs because of the economic downturn have now reinstated that benefit. The Towers Watson survey found employers most frequently offered to match 50 percent of employee contributions, up to 6 percent of their income.
2012 IRA changes
Also new in 2012 are relaxed income requirements for those wishing to contribute to IRAs and Roth IRAs. The government allows income-eligible taxpayers to deduct some IRA contributions of up to $5,000 for younger workers and $6,000 for those older than age 50. But those with workplace retirement plans can now deduct traditional IRA contributions provided their income is less than $68,000 for those filing as singles or heads of household or less than $112,000 for couples filing jointly.
For those without a workplace retirement plan, the deduction phase-out occurs between $173,000 and $183,000 for couples. The new income limits represent a $2,000 increase for those with workplace retirement accounts and a $4,000 increase for those without.
In addition to changing the income levels for traditional IRAs, the IRS is allowing more taxpayers access to Roth IRAs. While money in traditional IRAs is generally taxed upon withdrawal, Roth IRAs are funded with taxable dollars. Upon retirement, disbursements from these accounts are then tax-free. In 2012, singles and heads of households with incomes up to $125,000 and couples with incomes up to $183,000 can make Roth IRA contributions. These amounts represent a $3,000 and $4,000 increase from 2011 levels.
$2,000 saver's credit for couples
More taxpayers will also be eligible for the saver's credit under 2012 IRS rules. Individuals considered low-income workers who contribute to an IRA or workplace retirement account can earn a saver's credit of $1,000 for singles and $2,000 for couples. In 2012, the government limits the credit's availability to those with adjusted gross incomes below the following amounts: $28,750 for singles, $43,125 for heads of households and $57,500 for couples. These new income amounts represent a $500-$1,000 rise over the 2011 limits.