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401(k) limit raised for pension plans

401(k) limit for 2012 tax year will be $17,000. IRS raising 401(k) contribution limit by $500 a year to account for inflation.

By Associated Press / October 23, 2011

An IRS employee enters the office in the JFK Federal Building in Boston this past March. The Internal Revenue Service is raising the maximum that employees can contribute to their 401(k) pension plans to $17,000, beginning next year.

Ann Hermes / The Christian Science Monitor / File

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WASHINGTON

The Internal Revenue Service is raising the maximum contribution that workers can make to their 401(k) pension plans without paying upfront taxes. The limit will rise by $500 to $17,000 next year.

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The increase is required by law to adjust for inflation. The ceiling hadn't grown since 2009 because inflation had been too low to trigger an increase.

Companies that set up 401(k) plans for their employees are free to limit maximum contributions at levels below the legal ceiling, and many do.

Thirty-three percent of workers ages 21-64 used 401(k) plans in 2009, the most recent year for which figures are available, according to the Employee Benefit Research Institute, a nonpartisan research group that advocates strong employee benefit programs.

Only 9 percent of people with a 401(k) contributed the maximum dollar amount to their plans in 2005, the most recent year for which that data is available, the institute said.

The IRS also is making inflation adjustments to the personal exemption, tax brackets and other parts of the tax code for 2012.

The personal exemption and the dependent exemption will grow to $3,800 each, a $100 increase from 2011.

The standard deduction for married couples filing jointly will rise by $300 to $11,900, while the standard deduction for single people will increase by $150 to $5,950. The standard deduction is used by the almost two-thirds of taxpayers who do not itemize deductions for items such as mortgage interest.

Tax brackets will change, too. For married couples filing a joint return, the taxable income at which the rate grows from 15 percent to 25 percent will be $70,700, compared with $69,000 this year.

The changes are all for the 2012 tax year. Most people will file their returns for that year at the beginning of 2013.