On Friday, the Internal Revenue Service (IRS) announced there will be an increase to the contribution levels for 401(k)’s, 403(b)’s, and the other similar government sponsored retirement plans. The changes will be as follows:
• You can now contribute up to $17,000 (up from $16,500 this year) to eligible plans starting in 2012
• Catch-up contribution limits for the same eligible plans will still remain $5,500 for anyone age 50 and over
• No change to the IRA (Traditional, Roth) contribution limits – $5,000 annually and $6,000 for anyone age 50 and older.
• Roth IRA income limits will be increased by $3,000 to between $110,000 and $125,000 for singles / heads of household and by $4,000 for $173,000 to $183,000 for married couples filing jointly.
• Tax deduction phase-outs for those who contribute to a Traditional IRA
• Increased Saver’s Credit income limits
These increases usually happen every couple of years to adjust for inflation.
Although it may seem small, anytime there is an increase in the contribution limit, it is an advantage for you because it allows you to save more and get that much closer to your retirement goals. For example, suppose you were fortunate enough to save the maximum amount of $17,000 per year from now until you plan to retirement and it made an annual 8% return, you’re money would grow as follows:
Use the graph to determine how many years you have until retirement (bottom) versus how much you think you will need each year when you finally retire (right hand side) (assuming you are old enough to legally withdrawal 4% each year). As you can see, it wouldn’t take long to build up some pretty substantial income. For example:
• After 20 years, you’d have $777,953 in your portfolio which would give you $31,118 each year (if you withdrew 4% annually).
• After 30 years, you’d have $1,925,815 in your portfolio which would give you $77,033 each year (if you withdrew 4% annually).