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Well the IRS raises the maximum annual 401k retirement contribution for the first time since 2009. The new limit increase is $500 higher than the $16,500 limit this year. The IRS noted the reason the limit has been push higher is an increase in the cost of living during retirement years. Limits are calculated based on a comparison of the cost-of-living index spanning the past year. In comparing this year to the same period in 2010, it was determined that the cost of living had jumped, resulting in an increased contribution limit. The retirement plans impacted by the limit increase include 401k, 403b, most 457 plans and the federal government’s thrift savings plan.

The IRS noted in its announcement that pension plans would not be the only tax-related adjustments made in 2012. Also, taxpayers will be allowed to claim personal exemptions of $3,800, up $100 from 2011. In addition, the standard deduction will be raised by $300 for married couples, $150 for singles and $200 for heads of households. Finally, the maximum earned income tax credit will increase to $5,891, up $140 from 2011. Qualifying income has also been boosted to $50,270 in 2012 from $49,078 this year. As you prepare to file taxes in the coming months, it’s good to note that the foreign income deduction, annual deductible amounts for Medical Savings Accounts and tax bracket thresholds will be higher for 2012. Other benefits, including the standard deduction for blind people and senior citizens will remain unchanged.

Five percent of the roughly 60 million 401k plan participants contribute the maximum amount. Companies that set up 401k plans for their employees can limit maximum contributions at levels below the legal ceiling. About 14 percent of companies do so. Much older 401k rules capped contributions at 15 percent of an employee’s salary. So, for instance, if your salary is $70,000, you can only contribute $10,500 a year to your 401k. About 30 percent of companies limit the 401k contributions of their highly paid executives because they must do so to comply with I.R.S. rules. Thirty-three percent of workers age 21 to 64 used 401k plans in 2009, according to the Employee Benefit Research Institute.


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