By Mark Miller
CHICAGO Oct 23 When the Internal Revenue
Service talks, Americans generally listen. But many will ignore
the message the agency sent last week: You can save more in your
tax-qualified retirement accounts next year.
The IRS announced a $500 cost-of-living increase for the
maximum tax-qualified contributions for 2013: $17,500 for 401(k)
accounts and $5,500 for IRAs.
Most retirement savers are not contributing anywhere near
those limits. Mutual fund company Vanguard reports that just 12
percent of participants in plans it administers socked away the
maximum in 401(k)s last year - and the median deferral rate
among workers participating in the company's plans was just 6
percent, which works out to $3,000 for a worker earning $50,000.
But even among workers with gross income above $100,000, the
average deferral rate was just 8.2 percent last year.
In part, the low saving rate reflects stagnant growth in
median incomes, the rising cost of health insurance and college
tuition, and other competing pressures on take-home pay. Those
pressures will grow next year, when the stimulus-related payroll
tax holiday is scheduled to expire. That means workers' tax
rates will revert to 6.2 percent from the current 4.2 percent.
But the low contribution rates also reflect plain old
inertia among some retirement savers. So if the $500 IRS bump
reminds retirement savers to do a check-up on workplace accounts
and IRA contributions for the year ahead, it would be a
"Whenever I talk to people about this, there are many who
can't hit the contribution limit," says Dan Keady, director of
financial planning at financial services firm TIAA-CREF. "But
even if you're not at the maximum, you can use this as an
opportunity to increase your contribution for next year by $500.
If you're paid twice a month, that's $21 per paycheck."
Seven out of 10 investors age 21-50 say saving for
retirement is their top financial priority, according to a
survey by money manager T. Rowe Price released last week. But 68
percent are contributing 10 percent or less of their pay; most
financial planners will tell you the ideal is at least 15
Chalk up some of this to the growing popularity of
auto-enrollment among 401(k) plans. While it has increased
participation rates sharply, the default contribution rate in
most of these plans is just 3 percent, and many do not have
"Saving 3 percent a year for retirement is like going to the
gym for six minutes," says T. Rowe Price senior financial
planner Stuart Ritter.
Ritter offers this scenario: A worker starts a job at age 30
and is auto-enrolled in her workplace plan, with a default
contribution rate of 3 percent. Her starting salary is $50,000
per year, and she gets a 3 percent raise every year. If she
never changes that 3 percent contribution rate - and if she
earns a 7 percent annual return on the portfolio - she will
retire at age 65 with $315,000.
But if she increases the contribution rate by 2 percentage
points every year until she is putting in 15 percent, she will
have a much larger retirement nest egg of $1,367,000 at age 65
if all the other variables stay the same.
Some key IRS rules to remember if you are looking to
increase your retirement savings next year:
- Catch-up contributions: Savers who turn 50 next year will
be eligible to make additional "catch-up" contributions of
$5,500 to workplace plans, or $1,000 to an IRA. Those rates are
unchanged from 2012. Just 16 percent of eligible savers utilized
catch-up contributions in 2011, according to Vanguard.
- Income eligibility: If you have a workplace plan and
contribute to an IRA, you can fully deduct your contribution if
your modified adjusted gross income, or MAGI, is $59,000 or
lower. For married couples filing joint tax returns, those MAGI
limits go up to $95,000 for a spouse covered by a workplace
plan; a spouse not covered by a workplace plan can fully deduct
IRA contributions with MAGI up to $178,000.
- Roth IRA contributions: The income ceilings for Roth
contributions also will rise next year. Single filers with MAGI
up to $112,000 can contribute the maximum $5,500; married filers
with income up to $178,000 can each make a full individual
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