Monday, October 24, 2011

IRA, 401(k) Contribution and Income Limit Changes in 2012

Employees with higher incomes will be eligible for a tax break if they save in a traditional IRA, can contribute to a Roth IRA, or qualify for the saver's credit. That's just one piece of good news from an IRS announcement late last week.

Higher IRA income limits: The contribution limits will stay the same ($5,000 for most, except those age 50 and older, who can contribute $6,000).  Workers covered by an employer plan who earn below a particular income threshold can get a tax break for contributing to a traditional IRA. That threshold is increasing this year for inflation. The tax break for traditional IRA contributions will be phased out for single/head of household (covered by a workplace retirement plan) between adjusted gross incomes of $58,000-$68,000. That number moves to $92,000-$112,000 (an increase of $2,000) for couples where the individual making the contribution is covered by an employer plan. Those without workplace retirement plans when the spouse is covered will see the deduction phased out between $173,000-$183,000, a $4,000 increase from 2011.

Roth IRA income limits provide more possibilities: You will be able to make a Roth IRA contribution if you make less than $125,000 (single/head of household), a $3,000 increase from 2011. If you are a married couple filing a joint income tax return, you can contribute with a combined income less than $183,000, up $4,000 from 2011.

This is a simplified cliff notes version of a complete picture, which includes reduced contribution amounts in certain income phase-out areas. It is best to use this written version with the actual IRS chart to best understand the changes.

CLICK HERE to view, bookmark or print the Roth IRA contribution chart from IRS

Saver's credit expands to higher incomes: In 2012, single workers who contribute to all types of IRAs, 401(k) or 403(b) accounts could possibly claim the saver's credit if they have MAGI (modified adjusted gross income) of up to $28,750, an increase of $500 from last year. The income limits increase to $57,500 for married couples filing jointly (up $1,000) and to $43,125 for heads of households (up $750). The tax credit is worth up to $1,000 for low-income singles/heads of households and up to $2,000 for couples.

The changes don't just apply to IRAs.

Employer-sponsored plan contribution limits rise: The number will rise $500 to $17,000 in 2012. This contribution limit is for 401(k), 403(b), 457 plans and the TSP (Thrift Savings Plan).

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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