As of 2013, the maximum IRA contribution increases by $500 to $5,500; 401(k) and similar plans get a similar $500 contribution boost, to a $17,500 upper limit in 2013. The “catch-up” contribution limits for age 50 clients remain the same: $1,000 for IRAs and $5,500 for 401(k)s, 403(b)s, 457s, etc. For small business owners with a SEP IRA or a Solo 401(k) plan, the maximum contribution rises by $1,000 in 2013, to $51,000, and up to $56,500 for those 50 and older.
“Go online or contact your Human Resources department now and request an increase in your salary deferral, beginning with your first paycheck in January,” advises Matthew Illian, a planner with Marotta Wealth Management in Charlottesville, Virginia. “The people there will appreciate the advance notice.”
Ideally, clients will be able to maximize contributions to a 401(k) and to an IRA, for a total of $23,000 in 2013, or $29,500 for those at least age 50. However, not all clients will have that much to invest in retirement accounts. In such situations, where should the money go?
Illian suggests that clients start by contributing enough to their 401(k) to get any company match. Subsequently, the best place to save is in a Roth IRA, which can eventually generate tax-free withdrawals of investment earnings.
However, there are income limits to Roth IRA contributions. For 2012 Roth IRA contributions, which can be made until next April 15, Roth IRA contributions are forbidden for single taxpayers with modified adjusted gross income of $125,000 or more while couples filing jointly can’t contribute anything to a Roth IRA with MAGI of $183,000 or more. In 2013, those cutoff points will rise to $127,000 and $188,000 of MAGI.
Illian recommends that taxpayers with income over these MAGI numbers consider a “backdoor” Roth IRA contribution. That is, contribute the maximum to a traditional IRA instead, and then convert that amount to a Roth IRA. There are no income limits to a traditional IRA contribution or a Roth IRA conversion.
For high-income taxpayers, the traditional IRA contribution won’t be tax-deductible. Converting may trigger income tax, depending on whether the client has other money in a non-Roth IRA.