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IRS raising limits on retirement contributions for 2013

By Jia Lynn Yang,December 26, 2012

The Washington Post’s Ed O’Keefe explains the tax breaks and deductions…

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 StanCorp Investment Advisers in Albuquerque.

“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 the 401(k) limits.”

For those over 50 years old, 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, the upper income limit will rise to $188,000 from $183,000. For singles, the limit will increase to $127,000 from $125,000. (All amounts are adjusted gross income.)

Monthly Social Security benefits are also set to rise 1.7 percent, another move meant to keep up with inflation.

There are two other tweaks to look out for: The IRS is raising the limit on tax-free gifts to $14,000 from $13,000. And Americans living abroad will be able to exclude up to $97,600 in foreign earned income starting next year, a modest increase from the current $95,100.

The higher contribution limits toward retirement plans come as many Americans look for ways to juice their returns after seeing their portfolios battered in recent years.

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 market and rising consumer confidence.

But 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.