retirement

Get the Most Out of Your Retirement Accounts

Here's what you can do to save a little extra next year even though contribution limits will stay the same.

What’s the maximum amount that I can contribute to my 401(k) in 2011?

Because of continued low inflation, retirement-plan contribution limits for 2011 will remain the same as the previous two years. However, the income-eligibility limits for deducting contributions to a traditional IRA or being able to contribute to a Roth IRA will increase slightly next year for some taxpayers.

Workers can contribute a maximum of $16,500 to a 401(k) in 2011, and those age 50 and older can stash an extra $5,500 in catch-up contributions for a total of $22,000 next year, the same levels as in 2010. The same contribution limits apply to 403(b) plans used by schools, hospitals and other nonprofit organizations; 457 plans sponsored by state and local governments; and the federal Thrift Savings Plan.

If you don’t have access to a retirement plan at work -- or even if you do and you want to save a little extra for retirement -- you can contribute up to $5,000 to a traditional or Roth IRA in 2011, depending on your income, just as you could in 2010. Workers (and their nonworking spouses) who are 50 or older can each contribute up to $6,000 to an IRA in 2011.

If you don’t participate in another retirement plan and you’re not married, you could deduct the amount of your IRA contribution on your tax return, regardless of your income. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have adjusted gross income between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, the deduction is phased out if one spouse participates in an employer-sponsored plan and the couple’s joint income is between $169,000 and $179,000, up from $167,000 to $177,000 in 2010.

The income phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to $179,000 for married couples filing jointly in 2011, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000 in 2010. Taxpayers with incomes above those levels cannot contribute to a Roth IRA.

However, even if you earn too much to contribute to a Roth IRA in 2011, you can still convert a traditional IRA to a Roth in 2011, regardless of income. But you will no longer be able to take advantage of the one-time opportunity to spread the tax bill on the conversion over two years. (If you convert a traditional IRA to a Roth in 2010, you can split the tax bill between your 2011 and 2012 returns -- see our Roth Conversions for Everyone special report for more information about who should consider converting and how to calculate the tax bill on the conversion.)

Concerned that you can’t afford to save for retirement? Uncle Sam provides extra help for low-income workers. The retirement savers’ tax credit is worth up to $1,000 (or $2,000 if married filing jointly) if you contribute to a 401(k), IRA or other retirement plan. The tax credit, which lowers your tax bill dollar for dollar, is in addition to any tax deduction you already receive for your contribution. The actual amount of the savers’ credit ranges from 10% to 50% of the first $2,000 you contribute to a retirement account for the year; the lower your income, the higher the credit.

To be eligible for the retirement savers’ credit, your 2011 income can’t exceed $28,750 if you’re single or $56,500 if you are married filing jointly (both income limits are up slightly from 2010). You must be 18 or older and can’t be a full-time student or claimed as a dependent on someone else’s return. If your income was lower than usual this year, perhaps because you were unemployed for several months or retired in the middle of the year, don’t overlook this valuable tax break. You may qualify for the retirement savers’ tax credit when you file your 2010 tax return next spring. For more information about the savers’ credit, see IRS tax tip Six Facts on How to Get Credit for Retirement Savings Contributions (which includes the 2010 income limits).

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