By Diana Palmieri
Back in late 2012, the IRS set its annual contribution limits for retirement plans, IRAs, and 401(k) plans for 2013, and there actually are some increases! There are also some other important adjustments to be aware of as well.
Annual Contribution Limits Have Increased!
The 2013 IRA Contribution Limit is now $5,500, up from $5,000. This applies to both Roth and traditional IRA accounts. The IRA catch-up contribution limit remains at $1,000 for those ages 50 and older.
The 2013 Contribution Limit for 401(k), 403(b), TSP, and most 457 plans is now $17,500, up from $17,000. The catch-up contribution on these plans remains at $5,500 for participants ages 50 and older.
The 2013 Contribution Limit for SIMPLE IRA increases to $12,000 from $11,500. The catch-up contribution limit for ages 50 and older remains at $2,500.
The reason for these increases? Inflation. 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 rose by $500 this year. Every little bit counts! While you may think that an additional $500 to an IRA may not seem like much, think of how it could compound and grow over a 20-year period.
Please check with your tax preparer about your deduction eligibility–some may not be able to deduct IRA contributions. You need to check and verify your income limits, contributions to employer-sponsored plans, etc. There are changes to adjusted gross income (AGI) limits for 2013. If it came to be that you were not eligible to contribute to certain IRAs and you took the deduction, it could cause a headache later on. You would need to remove excess contributions and possibly pay taxes and penalties (depending on when you filed your taxes). During tax season, it could not be a better time to ask and verify!
Other Changes of Interest
- Deduct a greater portion of Long Term Health Care Insurance Premiums–the deductible portion of LTCI premiums that may be included as medical expenses on Schedule A rises. Check with your tax preparer to see if you are eligible. The new limits are as follows:
Ages 41-50: $680
Age 40 or under: $360
Ages 51-60: $1,360
Ages 61-70: $3,640
Ages 71+: $4,550
- Kiddie Tax exemption rises to $1,000 from $950. The kiddie tax applies to a child’s unearned income.
- Annual Gift Tax Exclusion rises to $14,000, up from $13,000. You can give a gift to any person you wish, up to $14,000, tax-free.
- Social Security beneficiaries get a 1.7% COLA increase for 2013. Also announced was an increase in the Social Security wage base for 2013, to $113,700, up from $110,100 in 2012.
Also expect some changes from the IRS on the adoption credit, earned income tax credit, interest on education loans, and overall limitation on itemized deductions, to name a few. Ask you tax preparer for details. You can also go to www.irs.gov for information.
The information contained in this article is not intended to constitute legal, accounting, tax, investment, consulting or other professional advice or services. For specific information that applies to your circumstances you should consult a qualified tax advisor. In accordance with IRS Circular 230 Disclosure, and to ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this article was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.