Setting aside money in a tax-advantaged retirement account is one way that you can build your wealth for the future. You receive favorable tax treatment, either deferring taxes until a later date, or paying taxes now and watching your money grow tax free.
However, you can’t use these accounts as complete tax shelters. Indeed, there are limits on how much money you can contribute each year. On top of that, if you contribute to a Roth IRA, your contribution eligibility phases out according to your income. Every year, the IRS reviews economic conditions, and considers inflation, and makes a decision about whether or not to increase the contribution limits. For a couple of years, no changes have been made, but the IRS announced a few changes for 2012.
The contribution limits for both traditional and Roth IRAs hasn’t changed. For 2012, the annual contribution limit is $5,000, although those 50 and older can contribute $6,000 as a “catch up.”
Your ability to contribute phases  out as well, as your income increases. With a traditional IRA your tax deduction begins to phase out with your contributions. Even though you can continue to make contributions, up to the limit, at any income level, you won’t be able to tax the tax deduction. Those who are single begin phasing out their deductions with a modified adjusted gross income (MAGI) of $58,000, and those who are married filing jointly see a phaseout at $92,000.
You can’t get a tax deduction for contributing to a Roth IRA, and the phaseout levels are higher. Phaseouts begin at $110,000 MAGI for singles. At $125,000 a year, you can no longer contribute to a Roth IRA at all. The income limits for those married filing jointly are $173,000 to start, and the phaseout is complete at $183,000.
The contribution limits on a 401(k) plan are higher, allowing you to set aside more for your retirement in a year. For 2012, the contribution limit is higher, set to $17,000 for those under the age of 50. Those who are 50 and older can make the same catch-up contribution available in 2011 — an extra $5,500 for the year. Total contributions to a 401(k) — which include employer contributions (usually through a match program) — have been increased to $50,000.
A Roth 401(k) has the same contribution limits as the traditional version. However, there are no income phase outs, as with the Roth IRA. When you contribute to a Roth 401(k), you don’t have to worry about a higher income making you ineligible for the tax free growth that comes with a Roth account.
Health Savings Account Limits
It’s also worth noting that there are new Health Savings Account (HSA) contribution limits for 2012. You can contribute up to $3,050 for individuals, and $6,150 if you have family insurance. If you are over the age of 55, you can add an extra $1,000 as a catch-up. As long as you meet the eligibility requirements for a HSA, you can make your contributions and receive a tax deduction.
For 2012, savers are getting a bit of a break. Tax deductions have increased, and income limits have eased, depending on the accounts you have.
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