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Save $17K in your 401k next year

New IRS inflation-adjusted figures increase the maximum individual 401k retirement plan contribution to $17,000 for 2012. Should you take advantage of it?

By MSN Money Partner Nov 14, 2011 1:12PM

This post comes from Ashlea Ebeling at partner site


A surprising number of folks contribute the maximum amount to their retirement savings plans at work, and thanks to Internal Revenue Service inflation-adjusted figures released Friday, they can ratchet up even more tax savings in 2012.


The maximum an individual can contribute to a 401k retirement plan for 2012 is $17,000, up from $16,500 this year. The new higher limit applies to all 401k type retirement plans, including 403b plans and 457 plans.


"If you can afford it you should do it," says Craig Copeland, a senior research associate at the Employee Benefits Research Institute in Washington, D.C. Now is the time to take action, too, as many employers tie 401k enrollment with healthcare open enrollment that typically runs during late October or early November. Don't just keep the retirement deferral choices you made when you were hired without giving it a serious second look.


Who contributes to the max?

Fidelity looked at who was saving to the max in a February survey and found that one-third of retirees indicated that they deferred the maximum allowed in the period prior to retirement. By contrast, only 15% of employees still working are deferring the max, with only 12% of younger employees doing so, the survey found.


"Nevertheless, convincing younger employees to defer the maximum allowable amount could produce tremendous long-term benefits for them," according to "Reducing Regret In Retirement," a Fidelity report that summarizes the survey results. According to EBRI's look at the latest Department of Labor data available, in 2005, 9% of 401k-type plan participants contributed the maximum amount in that year.


For those 50 and older, in addition to the new $17,000 max, they can contribute an additional $5,500 a year as a catch-up. That catch-up amount didn't change from 2011. So the total annual contribution for these folks would be $22,500. Thinking of skipping the catch-up contribution? The Fidelity survey found that one in three retirees said they wished they had contributed more to their retirement savings.


Some high-income earners left out

For some highly paid employees (making $115,000 or more) the raise in the contribution limit won't help, however. That's because some employers' retirement plans fail a Department of Labor test that tries to equal the playing field between high-income earners and lower-income earners by limiting highly paid employees' contributions. Post continues below.

In that case, an employer will set a plan maximum percentage that can be contributed, typically between 8% and 12%. So someone making $120,000 might be able to put in only $9,600. There are exceptions to these restrictions for highly paid employees at smaller employers whose plans meet certain conditions.


Frank Palmieri, an employee benefits lawyer in Princeton, N.J., says he has advised small business owners who want to enable their executives to put away the max to modify their plans so they can. "They get frustrated if they can't put in the maximum amount," he says. "Every dollar put aside is important."


Save what you can

What if you're young and the idea of putting away $17,000 out of a modest annual salary is a nonstarter? Contribute at least enough to get your employer's match if there is one, and if not, start with anything, even if it's just $100 a month, says Palmieri.


A young employee making up to $28,750 (or a married couple filing jointly making up to $57,500) gets a saver's tax credit for retirement contributions, making it smart to start building a nest egg, no matter how small you start.


More on Forbes and MSN Money:


Nov 14, 2011 7:00PM

Hmmm. $17,000 / 52 weeks/yr = $326.93/ wk/yr.


Wow. Okay, where is the raise to help with that?

Nov 15, 2011 11:48AM

you are on your own! make it a point to help yourself and don't count on anyone.


The govt is already giving a tax break on 401k and a saver's credit if you qualify.  Maybe you can cancel your 852 channels of brain-rotting cable tv and your fancy pants smartphone and you won't have to eat cat food when you are old.


...of course you could just blow it now and ask the govt to help you later like everyone else does.

Nov 15, 2011 6:00PM

What planet do the people who write these story live on?  Or, worse yet, what planet do our lawmakers live on? 


There's only about 10% of the employees where I work that make $17K a year, let alone have that much to contribute to a retirement plan. 

Save $20 million in your retirement account next year easy.

Just go long on oil. When Israel attacks Iran later this year oil will be over $1,000 a barrel.

You could leverage $10,000 to make you $20,000,000 on this sure thing.
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