To encourage citizens to save more towards their retirement, the tax law provides incentives for retirement savings. There are different types of these tax sheltered retirement accounts ideal to different types of taxpayers. These retirement accounts have limits as to the amount of contribution that gets a tax relief. In October of 2012, the IRS provided the 2013 inflation adjustments to these tax sheltered contribution limits to allow taxpayers to save more funds towards retirement. These adjustments are provided below:
401 (K) Accounts
401 (K) accounts are retirement plans that are operated by employers as a benefit to employees. Usually, the employee contributes a given amount and employer matches the contribution. The qualifying contribution is not taxed and the growth of the retirement fund is also not taxed. However, distributions from the account are taxed. For 2013, the amount of tax free contribution will increase from $ 17,000 to $ 17,500. For individuals who are over 50 years old and over, the tax free contribution goes up to $ 23,000 for 2013.
Traditional IRA Accounts
Individual Retirement Accounts (IRA) are tax sheltered retirement plans that enable individual taxpayers to save for retirement. These retirement accounts are initiated and run by individuals as opposed to employers as in the case of 401 (k) accounts. For 2013, taxpayers will contribute $ 5,500 to traditional IRA accounts tax free – up from $ 5,000 in 2012. For taxpayers who are above the age of 50, their tax free contribution for 2013 will be at $ 6,500 up from $ 6,000 in 2012.
For taxpayers who have a workplace retirement plan such as a 401 (k), qualifying for the IRA tax relief is limited by ones Adjusted Gross Income (AGI). For 2013, this AGI limit is at $ 69,000 which is $ 1,000 above the limit in 2012. The contribution limit is lower for taxpayers who will earn an AGI of between $ 59,000 and $ 69,000 and who have a workplace retirement plan.
If a couple files jointly and one of the spouses has a retirement plan, then the couple can receive the IRA tax relief if they earn an AGI of below $ 115,000 for 2013 – the tax free contribution limit reduces from an AGI of $ 95,000. This AGI limits are $ 3,000 higher than those of 2012.
Roth IRA Accounts
A Roth Individual Retirement Account (IRA) is different from a traditional IRA account in that contributions made to the Roth IRA account are after tax. However, the growth of the funds in the account and the distributions from this account are tax free.
Tax free limits for contributions to a Roth IRA account are similar to those of traditional IRA accounts. This means that in 2013, taxpayers can now contribute up to $ 5,500 – and the amount goes up to $ 6,500 for those over 50 years of age. However, unlike traditional IRA accounts, the AGI limits for Roth IRA accounts apply whether you have a workplace retirement plan or not. In 2013, single filers and Head of Households who earn more than $ 127,000 will not qualify for a Roth IRA tax relief. For those who file jointly, the limit for qualifying for this relief is $ 188,000.