The Internal Revenue Service (IRS) has announced cost-of-living adjustments affecting dollar limitations for retirement plans and related items for tax year 2013. Below is a break down of key changes that may be of interest to employers and employees.
Many Retirement Plan Limits Will Change for 2013
Federal tax law provides for dollar limitations on benefits and contributions under qualified retirement plans, and requires that the limits be adjusted annually for cost-of-living increases. In general, many of the retirement plan limits will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.
Highlights of the adjustments for 2013 include:
- The elective deferral (contribution) limit for employees who participate in 401(k) plans is increasing from $17,000 to $17,500. The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
- The limit on annual contributions to an individual retirement arrangement (IRA) rises to $5,500, up from $5,000 in prior years. The catch-up contribution limit for those aged 50 and over remains unchanged at $1,000.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.
- For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $95,000 to $115,000, up from $92,000 to $112,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $178,000 and $188,000, up from $173,000 and $183,000.
Other limitations applicable to deferred compensation plans are also affected by these adjustments. For more details, take a look at the IRS cost-of-living adjustment table.
Retirement Planning Resources for Your Business
According to the IRS, experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. Employers who sponsor a retirement savings plan not only help employees save for the future—retirement plans can also help attract and retain qualified employees, in addition to offering tax savings for both businesses and workers. Some of the tax advantages include:
- Employer contributions are deductible from the employer's income.
- Employee contributions (other than Roth contributions) are not taxed until distributed to the employee.
- Money in the plan grows tax-free.
The Small Business Retirement Plan Resources offered by the IRS provide helpful information for employers when it comes to choosing, operating and maintaining a retirement plan. You can also check out the Retirement Plans Navigator, an online guide for choosing a plan, maintaining it and correcting plan errors.
For more information on sponsoring a retirement plan, please visit our section on Retirement Plans. And be sure to download our free Required Benefits Notices Checklist for a summary of key notice requirements that may apply to your plan.