Written by Harold Goedde | Posted in TaxConnections
Edited and Posted by: Harold Goedde CPA, CMA, Ph.D.
By Jia Lynn Yang, Published: December 26, 2012
The expiring Bush tax cuts aren’t the only laws worth watching for investors as the year ends. A number of new rules are kicking in next year that will allow workers to stash away more money in their 401(k)s and individual retirement accounts.
To keep up with inflation, the Internal Revenue Service announced this year that the annual limit on contributions to 401(k) plans is rising to $17,500 from $17,000. Annual contributions to IRAs, both traditional and Roth, are rising to $5,500 from $5,000, the first time since 2008 that the limit has gone up.
With many Americans worried about potential tax increases coming next year if the “fiscal cliff” remains unresolved, the extra boost in potential savings could be coming at a good time, said Garth Scrivner, a Certified Financial Planner with Stan Corp Investment Advisers in Albuquerque, NM.
“It’s kind of nice with the potential increases in taxes next year to have the ability to defer a bit more money,” Scrivner said. “We’re encouraging people at the end of the year to take an inventory of tax changes that are happening next year and, to the extent that they can, maximize their 401(k) contributions.”
For those over 50, the additional “catch-up” amount allowed will remain the same at $5,500, meaning the overall limit for such workers will be rising to $23,000 from $22,500.
In addition to raising the contribution limits, the IRS has also expanded how many people are eligible to contribute to Roth IRAs. For married couples filing joint, the upper income limit will rise to $188,000 from $183,000. For single and head of household, the limit will increase to $127,000 from $125,000. (All amounts are adjusted gross income.)
The higher contribution limits toward retirement plans come as many Americans look for ways to increase their returns after seeing their investment portfolios battered in recent years.
Starting January 1, 2013, monthly Social Security benefits will rise 1.7 percent to keep up with inflation. The Medicare premium deducted from your Social Security will also increase on January 1.
There are two other tweaks to look for: (1) The IRS is raising the limit on tax-free gifts to $14,000 from $13,000. (2) Americans living abroad will be able to exclude up to $97,600 in foreign earned income starting in 2013, a modest increase from the current $95,100.
Investors have enjoyed a pretty strong year in 2012, with the Standard & Poor’s 500-stock index rising about 13 percent. Despite concerns about the fiscal cliff, some analysts see signs that next year could include even more stock gains, driven by an improving housing and auto market as well as rising consumer confidence. The drawback is that ,if a compromise is not reached on the “fiscal cliff” by the end of the year, the tax rate on long-term capital gains and dividends will significantly increase in 2013.
Many workers saving for retirement still have a lot of ground to make up. More than half of working households run the risk of being unable to maintain their standard of living when they retire, according to a report released in October by the Center for Retirement Research at Boston College. The report, based on the Federal Reserve’s 2010 survey on consumer finances, was the first look by the center at how workers have fared since the financial crisis. It showed that the number of households at risk had risen to 53 percent in 2010 from 44 percent in 2007.
CIRCULAR 230 DISCLOSURE: Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.
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FAQs
The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan has increased for 2013. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan) is $17,500 in 2013 (up from $17,000 in 2012).
What is the 402g limit for 2013? ›
For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $17,000 to $17,500 for 2013. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the Federal Government's Thrift Savings Plan.
What is the IRS limit for retirement contributions? ›
The basic limit on elective deferrals is $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019, or 100% of the employee's compensation, whichever is less.
What were the inherited IRA rules in 2013? ›
If the decedent died in 2013 or earlier you generally have to take a required minimum distribution (RMD) from the IRA by year-end to avoid a 50% penalty for not doing so.
What is the maximum IRA contribution for 2013? ›
The maximum amount you can contribute to a traditional IRA or Roth IRA in 2013 increases to $5,500 (or 100% of your earned income, if less), up from $5,000 in 2012. The maximum catch-up contribution for those age 50 or older remains at $1,000.
What are the historical retirement contribution limits? ›
The maximum amount allowed as an IRA contribution was $1,500 from 1975 to 1981, $2,000 from 1982 to 2001, $3,000 from 2002 to 2004, $4,000 from 2005 to 2007, $5,000 from 2008 to 2012, $5,500 from 2013 to 2018, and $6,000 from 2019 to 2022. In tax year 2023, the maximum amount allowed is $6,500.
What happens if you exceed the 402g limit? ›
Deferrals more than the annual 402(g) limit are called “excess deferrals.” If excess deferrals are not corrected timely, the excess deferrals (including earnings on the excess during the taxable year) will be taxable income to you.
Do after tax contributions count towards 402g limit? ›
Unlike Roth contributions, earnings that accumulate in the after-tax account are taxable upon distribution. Such contributions are not new; before the growth of 401(k) plans, after-tax contributions were the most common type of employee contributions. After-tax contributions are not subject to the 402(g) limit.
How do you correct a 402 g excess deferral? ›
The first step to correcting a 402(g) excess deferral is notifying the plan's recordkeeper of the amount of the excess deferral. The recordkeeper will then calculate the earnings attributable to the excess and issue a distribution to the participant in the amount of the excess, plus earnings (or less losses, if any).
What happens if you exceed your 401k limit? ›
What Happens If You Go Over the 401(k) Contribution Limit? If you exceed the 401(k) contribution limit, you will have to pay a 10% penalty for early withdrawal, as you must remove the funds.
Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions. Annual catch-up contributions up to $7,500 in 2023 and 2024 ($6,500 in 2021-2020; $6,000 in 2015 - 2019) may be permitted by these plans: 401(k) (other than a SIMPLE 401(k))
How much does IRS allow for 401k contributions? ›
Highlights of changes for 2024. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.
What is the new 10-year rule for inherited IRA? ›
For an inherited IRA received from a decedent who passed away after December 31, 2019: Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule).
Are inherited IRAs subject to 10% penalty? ›
Beneficiaries don't have to worry about the 10% early withdrawal penalty traditional IRAs have. This is true regardless of the IRA owner's or beneficiary's age. However, distributions from an inherited traditional IRA are taxable.
Are inherited IRAs grandfathered in the SECURE Act? ›
While IRAs inherited prior to 2020 are “grandfathered,” accounts inherited in 2020 and thereafter are subject to more restrictive guidelines – namely, the 10-year rule, which effectively replaced the stretch IRA.
What is the 401k limit for 2014? ›
May Contribute up to $17,500 to their 401(k) plans in 2014
Highlights include the following: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $17,500.
What is the maximum 401k contribution for 2012? ›
The maximum annual 401(k) contribution an individual can make has been increased by $500 to $17,000. An individual who is 50 or older in 2012 can make an additional “catch-up” 401(k) contribution of up to $5,500 (unchanged from 2011) over and above the $17,000 limit.
What is the 401k contribution limit for 2011? ›
401 Defined Contribution Plans • The normal contribution limit, including both employer and employee contributions but not including any catch-up contributions, remains at $49,000. The elective deferral limit for 401(k) plans remains at $16,500.
How much does the 401k limit increase each year? ›
Every year, the IRS issues updates for the maximum amount of money employees may contribute to their 401(k) plans. For 2024, that amount is $23,000, with a catch-up contribution of $7,500 for those age 50 and older. For 2023, the maximum contribution amounts were $22,500 and $7,500 for catch-up contributions.
