2013 Tax Law Changes Affecting Your 401(k) And IRA

By Miranda Marquit
March 08, 2013

The thought of inflation strikes terror in the hearts of many Americans.

For most of us, times are tough enough as it is. The last thing anyone wants is for the things they buy on a regular basis -- milk, gas, bread, toothpaste, whatever -- to get more expensive.

But that's what seems to be happening. The latest numbers from the Bureau of Labor Statistics' monthly Consumer Price Index -- for January 2013 -- show that the "all items index" increased by 1.6% in the past year before seasonal adjustment.

What does this mean? Inflation is coming. But the Internal Revenue Service has taken note.

Sound bad? It's understandable. After all, the IRS is one of the few things that Americans are more afraid of than inflation.

But in this particular case, there's need to fear.

Let me explain...

Responding to the recent inflation realities, the IRS has altered its rules on retirement account contributions. Now you can take steps toward beating inflation by contributing more to your tax-advantaged retirement plan in 2013, and the income limits on deductions for contributions have been raised as well.

If you want to learn the best ways to maximize your savings by taking advantage of new tax laws, read on for some of the changes coming to your retirement plan in 2013:

1. You Can Contribute More To Your 401(k)

The annual contribution limit for a 401(k) plan has been raised from $17,000 in 2012 to $17,500 in 2013. This limit doesn't apply only to the 401(k). If you contribute to a 403(b), 457 or Thrift Savings Plan, you can contribute more this year.

It's important to note that the "catch up" contribution amount for those 50 and older remains at $5,500.

If your employer offers to match a percentage of your 401(k) contributions, take advantage of it because it amounts to free money for your retirement. The total that you can contribute to a 401(k) including your employer's match is $51,000.

Maxing out your account contributions will help you prepare for the future, and it also can help you reduce your tax liability through a tax deduction. If you want to max out your contributions, you need to set aside about $1,458 a month. At that rate, with a 6% annual return, you could grow your nest egg to $244,503.75 in 10 years.

It's also worth noting that 2013 marks the beginning of more transparent quarterly 401(k) statements. You'll see how much you are paying in fees and decide whether or not your employer's plan is the best value.

2. You Can Add More To Your Traditional IRA

For the first time in several years, the IRS decided to increase the amount you can contribute to an IRA. This year, the amount you can contribute increases by $500 to $5,500. The catch-up contribution for IRAs remains $1,000 for those 50 and older.

With a traditional IRA, you can take a tax deduction for your contributions up to a certain point. If you have a retirement plan through your employer, your tax deduction begins to phase out with a modified adjusted gross income (MAGI) of $59,000 for singles and heads of households. It's completely phased out at $69,000.

For married couples who contribute to an IRA through an employer, the range is $95,000 to $115,000. For those who don't have access to a plan through their job, it's phased out between $178,000 and $188,000.

3. Income Limit Restrictions Have Been Loosened For Roth IRAs

According to the new rules for Roth IRAs, you can make a little more money in 2013 and still be eligible to contribute. The MAGI phase-out range for eligible single filers and heads of household jumped by $2,000 from $110,000-$125,000 to $112,000-$127,000.

For those who are married and filing their taxes jointly, the phase-out begins at $178,000 and cuts off at $188,000 -- up from $173,000-$183,000 last year.

Remember that your Roth IRA contributions aren't tax deductible; instead, the benefit comes from paying taxes up front, then being able to withdraw money later from your Roth without paying taxes.

4. Increased Saver's Credit Income Limit

For those with low to moderate incomes, the saver's credit provides a way to earn a tax credit as an incentive for responsible retirement planning. For 2013, the saver's credit hinges on an increased income limit.

Married couples can earn up to $1,500 more ($59,000 in 2013, up from $57,500) and still be eligible to claim the saver’s credit. The income limit for individuals has increased to $29,500 (up from $28,750), and heads of household can claim the credit if they make up to $44,250 (up from $43,125).

Couples can get a tax credit of of up to $2,000, while singles can take a credit of up to $1,000 if they contribute to a qualified retirement plan.

The Investing Answer: As you complete your planning for 2013 (that is, the taxes you'll file by April 2014), keep these changes in mind. You have the chance to improve your nest egg and put the power of compound interest to work on your behalf.

Make sure to consider sources of free money, including your employer match and the saver's credit. And, at the very least, do what you can to reduce your taxable income with the help of tax deductions for your contributions.

The government wants to reward you for saving for retirement; take advantage of these opportunities.

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