2012 Will Bring Increases to Many Retirement Plan Limits

By Marcia Richards Suelzer, Toolkit Staff Writer

Many retirement plan contribution and benefit limits will increase in 2012, as a result of statutorily required cost of living adjustments to the base amounts. Of particular import to small business owners, the income phase-out for deductible individual retirement arrangements (IRAs) contributions and 401(k) limits are adjusted upward, but SIMPLE plan limits remain the same. The increase in the Social Security wage base (for the first time since 2009) will have an impact on plans that integrate benefit formulas with Social Security.

Many small business owners opt for the simplicity of Individual Retirement Arrangements, 401(k) plans or SIMPLE plans to provide retirement benefits for themselves and their employees. If you have opted for a 401(a) plan, then you will be able to make a larger contribution in 2012. Your maximum 401(k) contribution for 2012 is $17,000, up from $16,500 for 2011.

Although the amount that can be contributed to an IRA was not changed for 2012, an upward adjustment was made to the deduction phase-out range for individuals who are active participants in an employer-provided plan. This may allow you to make larger deductions in 2012. If you are single, the IRA deduction amount will start to phase out when your modified adjusted gross income hits $58,000 and $68,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (up from $56,000 and $66,000 for 2011). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $92,000 to $112,000 (up from $90,000 to $110,000 for 2011).

Tip. Eligible individuals who are age 50 or older can contribute an additional amount to IRAs, 401(k)s and SEPs each year. The amounts allowed for these catch-up contributions were not changed for 2012. As a result, the catch-up amount for IRAs remains at $1,000 and the catch-up amount for 401(k)s and SEPs remains at $5,500.

Defined contribution plans, defined benefits plans, and ESOPs are also affected by the cost of living adjustments. The limitation for defined contribution plans will increase in 2012 from $49,000 to $50,000. The maximum amount a defined benefit plan can pay a participant per year increases to $200,000 in 2012, up $5,000 from the 2011 payment limit. The amount for determining the maximum ESOP account subject to a five-year distribution period increases from $985,000 for 2011 to $1,015,000 for 2012. In addition, the maximum compensation amounts are increased to $250,000 ($115,000 for "highly compensated" employees.) As a result, the amount that an employee can save under one of these tax-qualified plans will increase.