5 Ways Retirement Tax Breaks Will Change in 2011

Income limits will be higher for some retirement accounts next year.

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401(k) contribution limits will remain the same next year, the IRS announced today. Employees who participate in 401(k), 403(b), and 457(b) plans and the federal government’s Thrift Savings Plan can save up to $16,500 in these accounts in 2011. The catch-up contribution limit for those age 50 and over will remain $5,500, as it has been since 2009. Here’s a look at how retirement savings tax breaks will change next year.

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401(k)s. The savings limits for employer-based retirement accounts are not increasing next year because inflation was too low to trigger an increase. The cost-of-living index used to calculate increases in 401(k) savings limits is currently greater than it was in 2009, but it is still less than the measurement for the third quarter of 2008. The maximum amount investors can contribute to 401(k)s will not be raised until the September inflation measurement climbs above where is was in 2008. Contribution limits cannot be reduced under current law.

Traditional IRAs. Certain income ceilings determine who is eligible for a tax break for contributing to an IRA. Individuals who have a retirement plan at work can contribute the full amount to an IRA until their modified adjusted gross income (AGI) reaches $56,000. The amount eligible for tax deferral is then gradually phased out until income reaches $66,000 in 2011, the same amount as this year. However, married couples filing jointly will get higher income limits next year. For a spouse who participates in a retirement plan at work the income phase-out range will be $90,000 to $110,000 in 2011, up from $89,000 to $109,000 this year. For IRA owners who do not have access to a retirement account at work, but are married to someone who does, the deduction will be phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000 this year.

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Roth IRAs. More high income retirement savers will be eligible to make Roth IRA contributions next year. Married couples filing jointly can contribute to a Roth IRA until their AGI reaches between $169,000 and 179,000 next year, up from $167,000 to $177,000 in 2010. The AGI phase-out range for singles and heads of household will increase from $105,000 to $120,000 this year to between $107,000 and $122,000 in 2011.

Saver’s credit. The AGI limit to get the saver’s credit will be $56,500 for married couples filing jointly in 2011, up from $55,500 in 2010. For heads of household the income limit will increase from $41,625 this year to $42,375 in 2011. Single people and married individuals filing separately can earn up to $28,250 and still get the saver’s credit, up from $27,750 this year.

[See 5 Retirement Tax Deadlines to Plan For.]

Traditional pensions. Workers fortunate enough to get a traditional pension at work can get a payout of up to $195,000 annually in 2011, unchanged from this year. However, that amount is not fully insured by the federal government if the pension plan fails. The Pension Benefit Guaranty Corporation, the government agency that insures private sector pensions, will pay out up to $54,000 per year to pension participants whose traditional pension plans terminate in 2011 if they claim their due at age 65. The maximum insurance amount is unchanged since 2009.