On October 18, the Internal Revenue Service (IRS) announced several policy updates that will take effect in 2013. The main change is that workers will be able to contribute an additional $500 to their 401(k) plans each year, tax-free. This will bring the annual limit on contributions to $17,500.
However, the catch-up contribution – an allowance for workers over 50 to add extra money to their retirement plans – was not expanded. This limit will continue to be set at $5,500.
In a press statement announcing the agency’s new policies, IRS officials explained that the decision to raise the limit was based on an increase in the cost-of-living index above a set threshold, which triggered statutory adjustments. For the same reason, the Social Security Administration recently announced that program participants would see a 1.7 percent increase in their benefits in the coming year.
In addition to 401(k) plans, the contribution limits are also being increased for 403(b)s, most 457 plans as well as the federal government’s Thrift Savings Plan. Other tax benefits will also be bolstered.
For instance, taxpayers will be able to give tax-free gifts totalling $14,000 in 2013, up $1,000 from the current limit. And, for U.S. citizens living abroad, the amount of foreign earnings that can be excluded from taxable income will be increased from $95,100 to $97,600.
The IRS’s policy updates will allow today’s workers to save more money for retirement in tax-advantaged plans, in anticipation of the rising cost of necessary goods. As we’ve previously discussed, employee benefits, including retirement savings options, are often a critical part of companies’ ability to recruit and retain talented professionals.
Working with corporate recruiters can also aid businesses in identifying, evaluating and recruiting leading professionals.
