401(k) and IRA Changes Coming in 2012

The 401(k) contribution limit will increase by $500 to $17,000 next year.

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Workers will be eligible to contribute an extra $500 to their 401(k)s next year, the Internal Revenue Service announced this week. Employees with higher incomes will also be eligible to get a tax break for saving in a traditional IRA, contribute to a Roth IRA, and qualify for the saver’s credit. Here’s a look at how 401(k) and IRA rules will change in 2012.

[See The 10 Best Places to Retire in 2012.]

Higher 401(k) contributions. The contribution limit for 401(k), 403(b), and the federal government’s Thrift Savings Plan will increase to $17,000 in 2012, up from $16,500 in 2011. However, catch-up contribution limits for those age 50 and over will remain $5,500.

Increased IRA income limits. IRA contribution limits will remain $5,000 in 2012, and $6,000 for those age 50 and older. And, like this year, only workers who earn below certain income levels get a tax break for contributing to a traditional IRA. But those income limits will relax slightly next year. The tax deduction for traditional IRA contributions will be phased out for singles and heads of households with workplace retirement plans who have modified adjusted gross incomes between $58,000 and $68,000 in 2012 ($92,000 to $112,000 for couples), up $2,000 from 2011. For IRA owners without a retirement plan at work the deduction is phased out if the couple’s income is between $173,000 and $183,000, up $4,000 from last year.

[See Unequal Access to Retirement Benefits.]

Roth income limits relaxed. The income limits for making contributions to a Roth IRA will be between $110,000 and $125,000 for singles and heads of household in 2012, up $3,000 from 2011. For married couples filing jointly the income limits will increase by $4,000 to a phase out range of $173,000 to $183,000.

[See Social Security Checks to Grow 3.6 Percent in 2012.]

Expanding the saver’s credit. Workers with slightly higher incomes will be able to get a tax credit worth up to $1,000 ($2,000 for couples) for low-income workers who save for retirement. Single workers who contribute to a retirement account such as an IRA or 401(k) may be able to claim the saver's credit if they have modified adjusted gross incomes of up to $28,750 in 2012, up $500 from last year. The income limits will increase by $1,000 to $57,500 for married couples filing jointly and by $750 to $43,125 for heads of households.

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