Employees will be able to contribute more in 2012. What are the new limits?
Saving and investing for retirement will be a little bit easier in 2012 thanks to new IRS rules allowing employees to contribute more to their retirement plans.
The Internal Revenue Service has announced higher limits on contributions to 401(k)s and other employer-sponsored plans. The changes reflect increases in the overall cost of living. Employees will be able to contribute up to $17,000 in the 2012 tax year, up from the $16,500 cap imposed this year. The catch-up contribution limit for employees age 50 and older remains unchanged at $5,500.
Thresholds for phasing out deductions to traditional Individual Retirement Accounts, or IRAs, and Roth IRAs, have also been raised. Income limits for the saver’s credit – also known as the retirement savings contributions credit – for low- and moderate-income workers are also higher.
The rules will affect millions of Americans saving and investing for retirement through employer-sponsored plans and IRAs. Total assets held in employer-sponsored retirement plans were $10.2 trillion at the end of 2010, up 11 percent from 2009, according to our 2011 Retirement Market Insights. Individual retirement accounts hold another $4.8 trillion in retirement savings.
Saving and investing for retirement remains a key financial concern for investors of all wealth levels. One-third of participants in 401(k) plans who expect to retire within the next seven calculate they will have saved between $300,000 and $600,000 in their plan, according to out study. Twenty-two percent expect to have saved less than $300,000.
One-third of 401(k) plan participants are concerned that they might outlive their retirement funds, according to our 2011 retirement survey of 940 investors with employer-sponsored retirement accounts. Less than 40 percent expect to have sufficient income to live comfortably in retirement,and only 25 percent say they are confident they will have the same after-tax income in retirement that they currently have.
The plan participants also express a low level of confidence in their retirement saving and investing strategies. Only one-third said they had a well-defined investment strategy, and only 26 percent consider themselves to be knowledgeable enough to “look out for my own interests when it comes to investments.” Less than 40 percent say they are confident that their investment choices will produce a good return.
The Financial Industry Regulatory Authority, a non-governmental regulatory group, urges Americans saving and investing for retirement to take full advantage of employer-sponsored retirement plans by maximizing their contributions and any 401(k) matching funds. FINRA calls the employer matches “free money” and describes the tax-free compounding of investment gains provided by a 401(k) a powerful retirement saving and investing tool.