On Oct. 20, the IRS released most cost-of-living adjustments for 2012. These are automatic adjustments built into the tax law, but they don’t always result in increases. With inflation now a little higher than it has been, some amounts that haven’t risen in recent years are increasing for 2012. Still, there are many amounts that will stay the same as they were for 2011. The changes — or lack thereof — could affect your tax planning.
For the first time since 2009, deferral limits for 401(k) plans — as well as many other retirement-plan-related limits — have gone up, though catch-up contributions (for those age 50 or older) and certain limits related to IRAs, SIMPLEs and SEPs remain the same:
Type of Limitation
|Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$16,500||$17,000|
|Annual benefit for defined benefit plans||$195,000||$200,000|
|Contributions to defined contribution plans||$49,000||$50,000|
|Contributions to SIMPLEs||$11,500||$11,500|
|Contributions to IRAs||$5,000||$5,000|
|Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||$5,500||$5,500|
|Catch-up contributions to SIMPLEs||$2,500||$2,500|
|Catch-up contributions to IRAs||$1,000||$1,000|
|Compensation for benefit purposes for qualified plans and SEPs||$245,000||$250,000|
|Minimum compensation for SEP coverage||$550||$550|
|Highly compensated employee threshold||$110,000||$115,000|
Unlike most other retirement-plan-related limits, IRA-related modified adjusted gross income (MAGI) phaseout range limits did see some increases in 2010 and 2011. And the trend continues for 2012:
Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:
• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
o For the spouse who participates, the 2012 phaseout range limits increase by $2,000, to $92,000–$112,000.
o For the spouse who doesn’t participate, the 2012 phaseout range limits increase by $4,000, to $173,000–$183,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2012 phaseout range limits increase by $2,000, to $58,000–$68,000.
Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution. But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:
• For married taxpayers filing jointly, the 2012 phaseout range limits increase by $4,000, to $173,000–$183,000.
• For single and head-of-household taxpayers, the 2012 phaseout range limits increase by $3,000, to $110,000–$125,000.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
(Note: Married taxpayers filing separately may be subject to much lower phaseout ranges for both traditional and Roth IRAs.)
Maximize benefits, minimize perils
The 2012 cost-of-living adjustments may provide you with some welcome benefits. These might include the ability to make larger retirement contributions.
If you’d like to maximize your tax benefits and minimize your tax planning perils for 2012 and beyond, please contact us. Our tax professionals can help you develop a strategy based on your specific situation and goals as well as tax law developments as they occur.
For more information contact Lance Drummond at [email protected].