401k, IRA and Roth IRA Contribution and Income Limits
This page contains a summary of the contribution levels, income limits and eligibility rules for popular tax-advantaged retirement plans. Links to detailed articles and additional resources are also provided. All data provided is for the most recent tax years, unless noted. I encourage you to subscribe (free) via Email or RSS to get the latest retirement plan and tax information updates.
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|401(k) and 403(b) Plans||Traditional IRA Plans||Roth IRA Plans||SEP IRA Plans|
|Simple IRA Plans||Withdrawal Ages||Catch-up Contributions||Best IRA Brokers|
Employer Sponsored 401(k) and 403(b) Plans
Traditional IRA Plans
An IRA (individual retirement account) is your personal savings plan for retirement, offering tax advantages and growth that compounds over time. Unlike employer sponsored 401k plans, where the administration is taken care of by the company, you are responsible for the opening and ongoing management of your IRA account. You can also rollover funds between the different IRA account types as your financial, employment or tax situation changes.
There are 3 things you need to consider when determining if you can make IRA contributions. The first is whether you (or your spouse if applicable) already contribute to an employer sponsored retirement account, like a 401k or 403b plan (discussed above). Secondly you need to see what you can contribute based on your Modified Adjusted Gross Income ( MAGI). Finally you need to determine how much you can contribute based on your filing status and age. The tables below provide a breakdown by these three considerations.
For workers already covered by an employer sponsored retirement plan (401k, 403b), contributions to a self-managed IRA plan are only tax deductible if their adjusted gross income (AGI) is between $58,000 and $68,000 (2012) and $59,000 and $69,000 (2013). For married couples, where the spouse is makes a contribution to an IRA plan and is covered by a workplace retirement plan, the 2012 income phase-out range is $92,000 to $112,000 (vs. $95,000 to $115,000 in 2013)
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
- Savers Tax Credit To Offset IRA and 401(k) Retirement Plan Contributions,
- Contributing to an IRA and Roth IRA if You Already Have a 401K
- Traditional IRA versus Roth IRA
Roth IRA Plans
Roth IRA contribution and income deduction limits also increased by $500 in 2013, after staying flat in 2012 and 2011. The income range increases mean more people are eligible to open a Roth IRA account in 2013. Updated details and a comparison to 2012 levels are shown in the table below.
The rules for 2012 IRA or 401K to Roth IRA conversions expire in 2013, restoring some of the earlier restrictions on how much could be converted.
SEP IRA Plans
A SEP IRA is a popular and widely used retirement plan management approach because it provides self employed owners or small business owners with a few staff a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement.
For 2012, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:
- 25% of compensation, or
- Up to $250,000 of an employee’s compensation may be considered. Minimum compensation required to be eligible for a SEP IRA is $550.
For 2013, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of: (changes in RED)
- 25% of compensation, or
- Up to $255,000 of an employee’s compensation may be considered. The minimum compensation amount remains the same at $550
The same limits on contributions made to an employees’ SEP-IRAs also apply to contributions made to a self-employed individual’s SEP-IRA. Contributions must be made in cash (no stock) and you have up to April 15, to contribute for the past year’s SEP IRA. A SEP provides high maximum contribution limits and relatively low setup cost, but an employer sponsored Individual 401k may allow a greater contribution at the same income level. Also, for those age 50+ there isn’t an additional $5,500 catch-up contribution provision like there is with the Individual 401k. A final point to consider is IRS rules do not permit loans with a SEP IRA. You can see more on SEP IRAs in this article.
A simple IRA is also a small business IRA-based plan with a simplified method for employers to make direct contributions toward their employees’ retirement and their own retirement. Employees may choose (not mandatory) to make regular contributions and the employer makes matching or non-elective contributions. SIMPLE IRAs are ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a 401K retirement plan. The main advantage of a Simple IRA to other tax advantaged retirement plans is the much lower administration costs. In order to establish a SIMPLE IRA, the business must have 100 or fewer employees and it also cannot have any other type of retirement plan in place.
2012 Contribution Limits: An employee may defer up to $11,500 for 2012, with employees over age 50 allowed to make a catch-up contribution of up to $2,500 (for a total of $14,000).
2013 Contribution Limits: An employee may defer up to $12,000 for 2013 (a $500 increase over 2012), with employees over age 50 allowed to make a catch-up contribution of up to $2,500 (for a total of $14,500).
Contributions under a SIMPLE IRA plan that count toward the overall annual limit on elective deferrals an employee may make to tax advantaged retirement plans. The employer is generally required to match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation.
When Can I Withdraw my Retirement Account Savings?
The key ages at which you can withdraw funds from the most commonly used retirement accounts without paying a penalty are:
401K and 403b retirement plans are generally company sponsored and the age at which you can start taking penalty (10%) free withdrawals is 59½ . However, you must start taking the minimum distribution (based on a variety of factors) by age 70½. You will have to pay regular income taxes on any withdrawals from 401K plans.
IRA are self-run tax-deferred retirement plans with investors being able to deduct all or part of their contributions from pretax income if certain conditions are met. Like a 401K, the official retirement age at which you can make penalty free withdrawals is 59½. You also may owe an excise tax if you do not begin to withdraw minimum distributions by April 1st of the year after you reach age 70½.
Roth IRA. Because a Roth IRA does not permit a tax deduction at the time of contribution, the restrictions on withdrawals are a little different to a traditional IRA. Contributions can also be made to your Roth IRA after you reach age 70½, unlike a traditional IRA. There is no requirement to start taking distributions while the owner is still alive and in fact the entire proceeds can be passed to your heirs tax free, a very useful estate planning feature. If you do take the tax free distributions, you can only do so after the savings have been in the account for a 5-year period beginning with the first taxable year for which a contribution was made (known as qualified distributions). Also, the IRA age limit for withdrawal still applies where you can only take penalty (10%) free distributions after you reach age 59½. A Roth IRA also allows you to take a one-time penalty and tax free $10,000 withdrawal if buying your first home.
There are exceptions to the above age limits based on special conditions and extenuating circumstances like spouse death, hardship, disability and qualified medical expenses. Also the payments from retirement plans can be provided as lump-sum distributions or via periodic payments (e.g. like an annuity) depending on the terms of the plan. Consult the IRS website and your plan administrator (e.g Vanguard, Fidelity etc) for detailed rules and regulations.
Can I Make Catch-Up Contributions to 401K, IRA, 403b and SIMPLE IRA Retirement Plans?
As detailed in this article, catch-up contributions allow people who feel that they do not have enough of a nest egg to make higher retirement plan contributions as they approach retirement.The catch-up contribution is not prorated or apportioned in the year you turn 50. This means that as long as you turn 50 by December 31st of the given year, you can make the full catch-up contribution amount.
In addition to standard deferral/contribution limits, eligible participants can make catch-up contributions up to $5,500. The following plans are covered by this maximum limit : 401(k), 403(b), and governmental 457(b). Plan contributions are not treated as catch-up contributions until they exceed the annual standard limit (2012; $17,000; 2013: $17,500). So for those over 50, the maximum contribution limit in 2013 would be $23,000. Catch-up contributions are generally made in the same manner as regular contributions, i.e. through an automatic payroll deduction or via the plan administrator. They must also be made before the end of the plan year which varies by plan and employer, but generally ranges from December 31st to April 15th.
For those over 50, SIMPLE IRA or SIMPLE 401(k) plans may permit catch-up contributions up to $2,500. This is above the standard $11,500 contribution limit for SIMPLE IRA plans. You can also make catch-up contributions of up to $1,000 to your Traditional or Roth IRA. Catch-up contributions to an IRA are due by the due date of your tax return (not including extensions). SEP-IRAs, which have higher maximum contribution limits, do not allow additional catch-up contributions like the other tax-advantaged retirement plans discussed above.
IRS Reference Sources:
To get more detailed information, forms and worked examples I suggest reviewing the official IRS publications which can be found via the following links. Leave a comment if you have any questions.