IRS Announces 2013 Retirement Plan Contribution Limits

The bad news, is that taxes went up on nearly everyone in the work force for 2013. Between the phased-in provisions of the Affordable Care Act and the Taxpayer Relief Act of 2012 – the bill that Congress passed over the New Years’ holiday to avoid the fiscal cliff, at least temporarily – Congress actually passed a sweeping tax increase that hit dividends, capital gains, interest, ordinary income, and even medical devices. There was one bright spot for savers, though: Congress raised the amounts individuals could contribute to a variety of retirement plans, both for individuals and small businesses.   retirement-savings-irs-limits

Individual Retirement Arrangements

Congress increased the annual maximum contribution to IRAs to $5,500. That’s up $500 from the previous year. Remember, taxpayers can combine IRAs and contribute to both Roth and Traditional IRAs, up to the annual limit. However, certain restrictions may apply to Roth IRAs and to deducting traditional IRA contributions, depending on income. As your adjusted gross income increases, Congress limits your ability to deduct contributions to traditional IRAs, or to contribute to Roth IRAs.

Note: The contribution limit for spousal IRAs also increases to $5,500. Normally, you have to have earned income to contribute to an IRA. But the law does not penalize stay-at-home spouses. A working spouse can contribute to an IRA on behalf of a non-working spouse.

Traditional IRA Contribution Phase-out Rules

If you are single, a qualifying widow(er), a head of household or you are married and neither of you are covered by a workplace plan, you can deduct your entire traditional IRA contribution. There are no income limits.

For those who are singles or heads of household and covered by a workplace plan, your ability to deduct contributions begins to phase-out at an AGI of $59,000, and phases out completely at $69,000.

For married couples filing jointly, the phase-out range this year is $95,000 to $115,000.

For those who are married, and not covered by a workplace retirement plan but who have a spouse who is, the deduction begins to phase out when the combined AGI is $178,000, and disappears at an AGI of $188,000.

 Roth IRA Contribution Phase-out Rules

Single individuals’ ability to make Roth IRA contributions now begins to phase out at an AGI of $112,000, and vanishes completely when the taxpayers’ AGI reaches $127,000. That’s up from the $110,000 to $125,000 phase-out range that was in effect in for tax year 2012.

For married couples filing jointly, the phase-out range is $178,000 to $188,000 (up from $173,000 to $183,000 in 2012).

For those who are covered by a workplace retirement plan and who are married filing separately, the limit is unchanged at $10,000.

Additionally, those ages 50 and over are authorized an additional $1,000 in “catch-up contributions.”

Defined Benefit Plan Limits Increase

The annual cost of living adjustment to retirement plan contribution limits also applies to traditional pension plans – technically referred to as “defined benefit” pension plans. Congress has raised the maximum annual pension income from an ERISA-qualified defined benefit pension plan to $205,000. That’s an increase of $5,000.

Per the Internal Revenue Service, the limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2013 from $50,000 to $51,000.

For a participant who separated from service before Jan. 1, 2013, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2012, by 1.0170.

401(k)s

Congress is raising the top annual contribution to 401(k)s to $17,500 – a $500 increase from the prior year. Catch-up provisions for those ages 50 and older remain unchanged at $5,500 per year.

SIMPLE IRAs

SIMPLE IRAs are a popular option for small-business owners who want to offer their employees the benefits of a 401(k) plan with an employee match, but don’t want to go through the time and expense of setting up a full-fledged 401(k) plan. The maximum allowable employee contribution to SIMPLE plans has increased to $12,000 – up from $11,500 the previous year. Those over 50 can make an additional $2,500 in annual contributions, on top of the $12,000 cap.

SEP IRAs

SEP IRAs are basically unchanged for most. The minimum annual range that qualifies for participation in a company SEP IRA is unchanged at $550. The maximum contribution allowed is 25 percent of compensation for corporations and roughly 20 percent for those who are self-employed, up to a cap of $255,000 in pay. That cap is up from $250,000 in 2013.

For a more expansive list of retirement plan changes for 2013, see the IRS’s 2013 Pension Plan Limitations.

Employee Benefit statements are a great way to communicate IRS changes with your employees. Studies suggest employees are counting on you for to help them plan for retirement. Why wait another moment? Give us a call today so we can get started on a customized communication plan for your employees.

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