If you’re like me, you like to maximize your contributions to your retirement plans.  But for the past three years, the Roth IRA Maximum Contribution limits have not increased, because inflation has not increased.  Like me, you may be wondering if things are looking up for 2012 and if a change is headed our way.

Historical Roth IRA contribution limits



Source: IRS Cost of Living Adjustment Tables

As you can see,  IRA Maximum Contribution limits (both traditional and Roth) have remained flat for the past few years.  This is due to a lack of cost of living adjustments because the rate of inflation has not been sufficient to generate an increase.  The IRS uses annual movement in the consumer price index for urban workers to adjust the limits.  In 2009, 2010, and 2011, these increases were not large enough to trigger an increase in the maximum contribution limits.

Alright already, what do you think the 2012 Roth IRA maximum contribution will be?

I did some analysis based on the Consumer Price Index tables since the last adjustment and I believe that the 2012 401k maximum contribution will remain flat again at 5,000 for those under 50.  This is based on data through Q2 2011.  The contribution limit only adjusts upwards in increments of $500, and right now we are only at $5,200.  In addition, I predict that the catchup contribution for those 50 or older will also remain the same at $1,000.   Thus, doing the math, if you are 50 or older at the end of 2012, your tax deductible limit on 401k’s will remain $6,000.  It’s important to note that these are just predictions, so check back in October when the official numbers are released to see how things netted out.

I feel pretty confident with these predictions but again take them with a grain of salt. Let me know if there are any other financial measures you’d be curious to know a prediction about for 2012.   Here’s to hoping for an (unlikely) increase in the 2012 Roth IRA maximum contribution limit (fingers crossed!).

An IRA is just one of many retirement saving plans.

You must make good decisions to build a solid personal financial plan for your retirement years. You know that the earlier you begin to save money, the faster it will accumulate but, what plan or plans are best? Is there “one big plan that fits all” or is a diversity of plans a better strategy? Before you build your plan, you need a framework within which you can distinguish one retirement savings strategy from another. You need to build a framework that describes and compares not just plans but the many rules and requirements that distinguish qualified from non-qualified plans, employer-sponsored from individual accounts, and one contribution limit from another. There are many details; your future lifestyle and comfort will depend in part on the choices you make now.

Where can I find information about retirement plans?

Key retirement plan rules for an individual retirement arrangement, more commonly known as IRA, are outlined in a series of Internal Revenue Service (IRS) resources documented on the IRS website as a listing of  Resources – IRA-based Plans.  There are many kinds of IRA-based plans with specific rules and regulations. You need to start by distinguishing between two main categories of tax-favored savings strategies; one known as a defined contribution plan describes how money is transferred to these special designated plans, the other are typically grouped together as defined benefit plans.

Your IRA-based retirement plan

What are defined contribution plans?

A retirement plan that provides long-term tax-saving benefits based on contributions is considered a defined contribution plan because any money, usually in the form of earned wages, is saved in a specially-designated account administered by a qualified financial institution or agency such as a bank or insurance company. Defined contribution plans can be established by individuals (like an IRA), employers for their employees (like a 401k) or by the self-employed for themselves or other beneficiaries.  There are retirement plans like a Roth 401k which is a combination of a Roth IRA and an employer-sponsored 401k; it overlaps some definitions by funding the retirement account with both employee pre-tax money from wages and employee after-tax contributions from other savings.

Key eligibility requirements, contribution limits, income thresholds, and contribution dates are different for each kind of IRA

The defined rules and regulations for each contribution plan pertain for example to eligibility requirements, annual contribution limits, gross income thresholds, and the period of time before the money can be drawn down (or distributed) without loss of tax advantages.  These may vary by plan.

What are defined benefit plans?

An IRA is a defined contribution plan. The IRS categorizes any qualified retirement savings plan that is NOT a defined contribution plan as a defined benefits plan. This negative definition simply means that the purpose of the savings plan is to accumulate a large enough amount of funds to provide specific benefits to participants of the plan. Unlike a defined contribution plans that focus on accumulating cash over extended periods of time, any retirement plans that targets specific payouts of cash or some other guarantee require professional advice. Features of a defined benefit plan are based on actuarial (statistical) assumptions about longevity, economic conditions such as inflation, and personal considerations pertaining to lifestyle affect the selection of one plan benefit over another. An IRA defines how your money is contributed or deferred from income taxes; it does not “define” your retirement benefits.

What is an IRA?  What are key characteristics I need to know?

A traditional IRA is a defined contribution plan that is created by an individual to save money for retirement. While there are many variations on the individual retirement arrangement theme (such as traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA), there are key characteristics you need to research in making retirement plans.  Our family of websites documents both employer-based and individual plans like 401ks and the many kinds of IRA.

Your age, marital status, and whether you participate in an employer-sponsored retirement plan are key factors when planning an IRA

Depending on your age and marital status, you need, for example, to consider annual maximum contribution limits, gross and adjusted gross income thresholds, tax treatment, the last day you can make an annual contribution, and the earliest date you can withdraw funds without tax penalties. These rules and regulations vary depending on the kinds of IRA you use.  Most people will, depending on circumstances, establish more than one kind of IRA during their “working years”.  Use our family of websites as your information framework to IRAs and the many other retirement plans as you make personal financial choices to accumulate cash and save for your retirement.