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Saving more for retirement in 2013

By Kay Bell · Bankrate.com
Thursday, October 18, 2012
Posted: 2 pm ET

If you're a baby boomer like me, you're worrying a bit more every day about when -- or whether -- you'll be able to retire.

Sure, politicians assure us that Social Security will be there for us. But we know we can't, or don't really want to, live on that federal retirement money alone.

So we stash as much cash as we can afford in retirement plans.

The good news is there are some tax advantages to encourage us to do just that.

The Internal Revenue Service today released inflation-adjusted amounts for individual retirement accounts and pension plans to help us keep our savings on track.

401(k) increases

Workplace plans, generally known as 401(k)s, offer retirement and tax benefits. Workers put money into 401(k)s before their payroll taxes are computed, so that means a bit less in taxes taken from worker paychecks. The money in the accounts isn't taxed as the account grows. And in many cases, employers match a portion of the contributions.

The downside is that when the account owner starts taking out money in retirement, taxes are due at the account owner's ordinary income tax rates.

Still, it's an easy way to save for retirement. And for 2013, you can put up to $17,500 in a 401(k). That's up from $17,000 in 2012.

If you're 50 or older, you can contribute even more -- an extra $5,500. That means a worker nearer to retirement can catch up by stashing as much as $23,000 in a 401(k) in 2013.

OK, that's a lot of money, and you can't really afford to take that much out of your pay to put toward retirement. You are, after all, trying to live in the here and now.

That's cool. Contribute what you can, and try to put in at least as much as your employer will match.

Traditional and Roth IRA increases

You also can put money into an individual retirement account, either a traditional IRA or a Roth account.

A traditional IRA might provide you a tax deduction for the year in which you contribute. A Roth isn't deductible, but when you take the money from this account in retirement you won't owe any taxes.

There are some changes in amounts related to IRAs for 2013.

You can contribute $500 more to both traditional and Roth IRAs next year. The limit for both types of accounts is $5,500. The catch-up amount for older IRA owners, however, remains at $1,000 in 2013.

You also can make a bit more money in 2013 and take advantage of an IRA.

If you have a workplace plan, such as a pension or 401(k), the amount of a traditional IRA contribution you can deduct is limited by your adjusted gross income, or AGI. In 2013, you still can claim at least a partial deduction if, as a single or head-of-household filer, your earnings are between $59,000 and $69,000. That means you can make $1,000 more than last year and still get some tax deduction for your traditional IRA contribution.

Married couples filing jointly where the spouse who makes the IRA contribution is covered by a workplace retirement plan don't see the deduction phase out until their joint AGI is in the $95,000 to $115,000 range. That's $3,000 more than in 2012.

If the married IRA contributor is not covered by a workplace retirement plan but his or her spouse does have a 401(k), the IRA deduction is phased out if the couple's income is between $178,000 and $188,000. That's $5,000 more than in 2012.

As for Roth IRAs, you can't contribute to this type of retirement plan if you make more than a certain amount. Those levels are increased for 2013.

The phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, a $5,000 increase from 2012 limits. For singles and heads of household, the income phase-out range is $112,000 to $127,000; that's $2,000 more than in 2012.

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