Saving for retirement has always been hard. But starting in 2013, the IRS is making it a little easier for you to put more money aside for your golden years.
On Oct. 18, the IRS announced that the contribution limits for the most commonly used retirement accounts -- IRAs and 401(k) plans -- would be going up. For 2012, you can put as much as $5,000 into an IRA and up to $17,000 in a 401(k) account. In 2013 those amounts increase $500 for both types of accounts. The additional amounts that those age 50 or older are allowed to put in will remain the same – an extra $1,000 for IRAs and $5,500 for 401(k)s.
The reason for the changes? Inflation. Inflation adjustments are designed to let your retirement savings keep pace with rising costs of living.
The IRS determines contribution limits using a factor that takes changes in the Consumer Price Index into account. Since inflation has been generally subdued in recent years, this is the first contribution limit boost for IRAs since 2008, when the new rules for determining limits took effect. For 401(k)s, this will mark the second straight annual increase: Limits were stuck at $16,500 from 2009 to 2011 before they rise by $500 this year.
An extra $500 may not sound like much, but having the flexibility to boost your retirement savings could result in your having a lot more than $500 extra by the time you retire.
In addition to contribution limits, some other changes could affect some taxpayers.
For instance, if your earnings are above a certain amount, then you may not be able to deduct contributions you make to a traditional IRA if you or your spouse has coverage in a retirement plan at work. Other limits govern whether you can contribute to a Roth IRA at all or are eligible for a retirement savings contribution credit of up to $2,000. Overall, the figures reflect adjustments of about 2.5%.
Where there's more uncertainty, though, is with next year's tax brackets. Ordinarily, we'd have a good idea of what those brackets would look like by now. But with the fiscal cliff looming, planning your taxes for 2013 and beyond has become a more daunting task.