The Maximum 401K Contribution in 2012 is

$17,000! That’s right, we finally got an increase for the first time in 4 years from the IRS.

The 2009, 2010, and 2011 maximum 401K contribution limits had all been stuck at $16,500. A 3% increase isn’t much, but I’ll take it. The last increase was when 2009′s 401K maximum had increased $1,000 over 2008′s $15,500 maximum.

403B and 457B plans will receive the same bump in limits in 2012.

The maximum 401K catch-up contribution per year for those over 50 years old, however, stays the same at $5,500 over the standard contribution limit in 2012.

The History of 401K Maximum Contributions 

Believe it or not, the maximum contribution level has increased in all but six years going back to it’s beginning in 1987 (75% of the time). Three of those six years without an increase were the last three years.

It’s somewhat surprising we didn’t get increases while cost of living was seemingly trending upwards – but I guess that’s what happens when the government wants to encourage spending.

It’s also worth nothing that the maximum 401K contribution amount has never declined.

How to Max Out your 401K in 2012

If you would like to max out your 401K in 2012, take $17,000 and divide it by your total salary from your employer. For example, if you make $68,000 per year (includes bonuses), then take $17,000 and divide by $68,000 to calculate the percentage of your pay you would need to contribute to max out your 401K.

In the above example, it would be 0.25, or 25%. Next, work with your HR department or your 401K administrator update your 401K contribution percentage.

Going Beyond your 401K?

I realize not many folks will be able to contribute the maximum. If you do, however, it’s probably in the top 5 things you can do for your financial future, especially when a possible employer 401K match is at stake.

If you do max and want to contribute more, you can create a Traditional or Roth IRA. I moved both of mine to TradeKing, who has zero maintenance or inactivity fees and trades are only $4.95. If you have left an employer and have old 401K’s sitting around, you may want to consider a rollover. You’ll probably be saving money on fees in an IRA versus your 401K.

401k Discussion:

• Do you plan on maxing out your 401K this year or in 2012?
• Have you ever maxed out your 401K?

Related Posts:

• 10 Free Financial Services
• Roth 401K Basics
• The Complete Guide to Choosing Between a Traditional 401K and a Roth 401K
• Choosing Between a Traditional 401K and a Roth 401K, Part II: How will my Choice Effect Early Retirement?

2012 IRS Maximum 401K Contribution Increase Announced is copyrighted by 20somethingfinance.com without consent to republish.

It comes from reader, Sandi, who writes in,

“I just started a new job and in 3 months I’ll have to decide between a regular 401K or a Roth 401K. The employer contributes 5% salary to either. I’d never even heard of a Roth 401K before. What are the major differences? Are there more benefits to one over the other?”

Great question, Sandi!

I believe that the choice between an IRA and 401K is pretty clear cut. However, the choice between a Roth retirement account and a traditional retirement account is always much more subjective.

I’ll discuss what considerations should go into the decision right after covering the basics.

What is a Roth 401K?

Roth 401K’s are relatively new in the world of retirement accounts. They were first introduced in the United States in 2006, but their adoption has been a little slower. According to U.S. News, only 29% of companies in the U.S. have the Roth 401K option. If you do, consider yourself lucky.

A Roth 401K combines many of the benefits of the Roth IRA and the Traditional 401K.

You have the same 401K maximum contribution as a Traditional 401K while still having the tax now/no tax in retirement benefits of a Roth IRA.

Still, there are some important distinctions to be made and a Roth 401K might not be the best for everyone.

Are Roth 401K Matching Contribution Tax Free?

This thought crossed my mind a few years ago when I found out my employer was adding a Roth 401K option: “Wow, I can get post-tax matching contributions to a Roth 401K! More free 401K match dollars!

It’s probably the most common Roth 401K misconception there is.

Unfortunately, Roth 401K matching funds are not post-tax dollars.

When you open a Roth 401K, your employer will open a separate traditional 401K. All matching funds that go into that traditional 401K are pre-taxed, meaning that you are not taxed now, but you are taxed on withdrawals in retirement.

What is the Maximum Employee and Employer Roth 401K Contribution?

Same as the Traditional 401K, the maximum Roth 401K contribution for employees is $17,000 in 2012, or $22,500 for those 50 and over.

The maximum employer contribution for a Roth 401K is also the same as the traditional – $50,000 (combined with employee contribution) or 100% of the employee’s salary.

Roth 401K or Traditional 401K?

Getting back to the original question, there is no right answer on the Roth vs. Traditional 401K question.

Many financial pundits recommend young professionals go with the Roth because they claim you’ll be in a lower tax bracket now than when you are in retirement due to lower earning power now. As such, they argue that it’s to your benefit to get taxed now (Roth) vs. being taxed in retirement (Traditional).

Sounds great in theory, however, I think it’s a flawed argument.

There is an assumption that you will have so much saved for retirement that you’ll actually be earning more income on your retirement account withdrawals than the income you are making right now. That’s not always going to be the case. In fact, for many, the opposite will be true. Painting broad brush statements like that are dangerous.

Others argue that tax rates will only go up in the future, so you might as well pay lower taxes now. This is another dangerous assumption to make. Short-term budget shortfalls may fuel this thought. However, when you look at the historical income tax rate, taxes are lower now than at any point since 1931! The long-term trend has been downward. And with one political party making it their entire platform, that may never change.

Roth 401K vs. Traditional 401K Chart

To understand the differences between the two, it’s often most easily observed through a chart.

As you can see, Roth and Traditional 401K’s are very similar, with the exception of the pre/post tax difference. Unfortunately, only you can answer the question of whether or not you want to be taxed now or in retirement.

It’s a lifestyle choice based on your long-term vision for your finances.

Can’t figure it out? You could always split your contributions between the two!

Roth 401K Discussion:

• Does your employer offer a Roth 401K?
• Do you invest in a Roth 401K over a Traditional 401K or vice versa? Why?

Roth 401K Basics is copyrighted by 20somethingfinance.com without consent to republish.

It’s a great question. And it’s important to get right because there are long-term financial implications.

Usually when people ask me this question, it starts a series of other questions.

So I will do my best to address the original question and some of the other common questions that follow. And I’m curious to see what other questions arise for you.

Roth IRA or 401K?

The quick answer? It depends. When someone asks me this, I immediately follow-up with this question, “What kind of a 401K match does your employer offer?”.

In my 401K match post, I highlighted the following statistics from the National Compensation Survey:

• 49% of employers with 401K plans match 0%
• 41% match a percentage of employee contributions between 0-6% of salary.
• 10% match a percentage of employee contributions at 6% or more of salary.
• The median is a 3% match.

With those statistics in mind, there are two different ways to answer this question:

If your employer matches 0% of your 401K contribution…

Invest in IRA’s first – either a Roth IRA or a Traditional IRA (Roth IRA’s have a buzz about them, but don’t overlook Traditional IRA’s). Max them out. Then invest in your 401K.

Why? You’re not getting a match in your 401K, so there is no benefit to investing in it over an IRA other than the maximum 401K contribution being higher than the maximum IRA contribution. And you’ll have more investment options available to you in the IRA, which can mean lower fees for you. So max out your IRA contribution, THEN invest in your 401K for additional retirement savings and tax benefits.

If your employer matches your 401K contribution…

Invest in the 401K first in order to get the match. That is FREE MONEY that you will not get via IRA contributions. Invest in the 401K until you get the maximum employer match you can possibly get for the year, all the way up to the maximum personal 401K contribution level ($16,500 in 2011) if your employer matches that far. Then invest in your IRA. Once your IRA is maxed out, go back to the 401K.

Roth IRA vs. 401K Conclusion

That’s really as simply as I can answer the IRA vs 401K question.

Keep in mind that the maximum contributions for IRA’s and 401K’s are completely separate and independent of each other. This is not an ‘or’ choice. You can invest in both simultaneously, if you’d like. In fact, I’d encourage you to.

Also contributions to one don’t count against the other. One happens to be with your employer (401K) and the other does not (IRA).

Where Can I Get an IRA?

If you haven’t opened your IRA yet, check out my post on how to start an online broker account. TradeKing and OptionsHouse are two of my favorite online brokers for IRA’s.

Related Posts:

• 10 Free Financial Services
• Zecco Review
• TradeKing Review
• Passive Index Investing

Invest in a Roth IRA or 401K? is copyrighted by 20somethingfinance.com without consent to republish.

You have the account all set up for you, hopefully you get a 401K match, you click a few buttons to select from your options, and you can wash your hands of it.

But what do you do with all that money outside of your 401K?

0% of My Peers Invested Outside of their 401K?

I have an interesting story that led to me putting together this post.

I decided to teach a ‘personal finance for beginners’ course at work. Attendance was maxed out at 30 people – most of whom were in their twenties and eager to learn more about personal finance (awesome, by the way). An interest in investing bubbled up from the questions from people attending the course, while discussing 401K’s.

I then asked the question, “how many of you in this room invest outside of your 401K?”.

<dead silence>

Zero people raise their hands. ZERO!

Before I asked the question, I thought I might get a minority response, but not this. For color, we’re talking about a group of 30 very highly educated, high income, white-collar professionals (almost all without children or home expenses), and ZERO of them had even taken the first step to investing on their own. Shocking! (continued below)…

How I Got Started Investing

Ever since I graduated, I’ve thought to myself that investing was a necessity. What else would I do with my additional income so that I could make it work for me and so that it could evade the corrosive effect of inflation over time?

About a year after graduation, I decided to make the leap. I first read some books, including Personal Finance for Dummies (highly recommended), read up on investing in Kiplinger and Smart Money magazines (both are great), watched a lot of Jim Cramer (not recommended at all), started up an account with Scottrade, and I was off to the races.

It was mostly a disaster. I was burned on a number of investments, and my overall strategy has changed quite a bit since then. I’ve lived and learned from my mistakes (of which there’s been plenty).

And then EVERYONE got burned by the recession and subsequent market nosedive.

Despite all that, sitting on cash for the rest of your life is not really a viable option. With inflation, you will get beat. Your cash will lose its value, and you’ll be left behind. Everyone seems to know that. But, as evidenced by my discovery, something is preventing people from even getting started in the first place.

I didn’t dive too deeply into the “why not?” in that meeting, but I have been incredibly curious ever since. I generally understand the barriers to getting started, but I wonder if one stands out amongst the others as being the main limiting factor.

Once I find out what the biggest barriers are, I’d like to explore each and how to overcome them.

Investing Discussion:

• What are (were) the main barriers preventing you from investing outside of your 401K?
• What fears do you have of investing?
• What are you doing with the money you have saved?

Take the Poll!

Related Posts:

• How to Make a Stock Trade
• What is a Mutual Fund?
• Zecco Review
• TradeKing Review

Zero of My Peers Invest Outside of their 401K?! Why Aren’t You? is copyrighted by 20somethingfinance.com without consent to republish.

I have worked at employers who have matched anywhere from 2% to 7% of salary, and even one that matched in an entirely different way – by percentage of my personal contribution. At the same time, my wife’s employer matches based on an ambiguous end-of-year profit sharing model (which has resulted in a 0% match the past two years). They get an F – in consistency and generosity.

Whatever your employer matches, you should know what the typical 401K match out there is for the following reasons:

1. It can help you compare total compensation, or real wage, when comparing employer offers. Those employers who skimp on your 401K match are likely to skimp in other areas as well.
2. It can signal whether or not your current employer is offering a good match that you should not be overlooking while employed by them.

At the same time, vesting schedules can vary widely and should be considered as well.

So let’s dive into the averages so that you can see where you stand.

Average 401K Match

According to the Bureau of Labor Statistics, the typical or average 401K match, can vary widely. Their 2010 National Compensation Survey, found that of the 61% of employers who offer a 401K plan (a sad statistic in itself):

• 49% of employers with 401K plans match 0%
• 41% match a percentage of employee contributions between 0-6% of salary.
• 10% match a percentage of employee contributions at 6% or more of salary.
• The median is a 3% match.

Well, that’s pretty depressing.

401K Matching Vesting

What paints an even grimmer picture on this data are the vesting schedules. Only 22% of 401K matching vests immediately. Also at 22% are ‘cliff’ vesting schedules. These plans require you to stay with an employer for a minimum number of years, or you don’t get any of the match. And 47% have a ‘graded’ vesting schedule – plans that slowly vest the match with every year of service until you hit 100% (usually at 5 years).

On top of that, 32% of employers don’t even allow you to contribute to the plan unless you’ve been with an employer for a minimum of a year. You heard that right, you don’t have the ‘privilege’ of contributing YOUR money to YOUR retirement until after a year at many employers.

401K Matching Takeaways

Considering that most 401K plans are horrible after looking at this data, pensions are going extinct (if not entirely dead already), and Social Security is in question, it’s really every man/woman for his/herself when it comes to a stable retirement. Here is what I take away from this data.

1. If you get a match, take advantage of it.
2. If you are in the minority who get a match on over 6% of your salary, GET THAT FULL MATCH EVERY YEAR.
3. If you don’t get a match at all, open up and contribute to a Roth IRA or Traditional IRA (I house both with TradeKing). Of course, always get free 401K matching dollars before contributing to an IRA. And you might even want to consider a new employer if you’re not getting a pension.
4. Regardless of match, if you can make the maximum 401K contribution in a given year, do it. The 2012 401K maximum contribution is $16,500.
5. If your 401K fees are high or you don’t have many investment choices, voice your concern to your HR/benefits department in a constructive manner.

401K Match Discussion:

• How does your 401K match ‘match up’? How does the plan work and what is the match?
• How does your employer’s vesting schedule work?

Does your 401K Match Up Against the Averages? is copyrighted by 20somethingfinance.com without consent to republish.

Did you know that your employer-sponsored 401K plan is able to charge you fees beyond the management fees of the funds that you invest in? It’s the dirty little secret of 401K plans. Up until a few years ago, I had no idea that these 401K fees existed. I was under the impression that my employer covered all fees as a benefit to me. I was wrong.

You need to do your homework on this one, because avoiding unknown fees, when compounded over decades, can have a profound impact on your retirement plans. According to the U.S. Department of Labor 401k fee website:

“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”

That’s worth repeating (and bolding): 1 percent in 401K fees can reduce your retirement balance by 28%.

Where do these fees come from?

401K Fees Fall into 3 Categories

1. Plan Administration Fees
2. Investment Fees
3. Individual Service Fees

Where can you See your 401K’s fees?

1. Your plan administrator should be able to provide you with a list of fees.
2. Your annual account statement should list all associated fees.
3. Your 401K should have a summary plan description (SPD) that separates what you pay and what your employer pays. This is given to you when you begin your plan and every 5 years.

Where Am I Going with this?

Not knowing what your 401K is costing you prevents you from taking frugal action. If you know your fees, you can:

1. Determine if it makes sense to switch to roll old 401K’s into your present 401K if it’s cheaper.
2. Determine if it makes sense to roll old 401K’s into an IRA that may be cheaper.
3. Determine if it makes sense to just get your employer’s match in your 401K and then work on contributing to a Roth IRA or Traditional IRA instead.

Final Thoughts on 401K Fees

This is definitely a case where a little bit of homework (half an hour or so) can literally shave or add years to your working life. So get motivated to look into this and seek professional advice if you need to!

401K Fee Discussion:

• Did you know that your 401K charged you fees beyond trading fees and mutual fund management fees?
• What kind of fees have you been paying to use your 401K?
• Does this make you want to switch to an IRA?

Related Posts:

• Roth 401K vs. Traditional 401K
• 401K Maximum Contribution
• Traditional & Roth IRA Maximum Contribution

The Hidden 401K Fees that Can Crack your Nest Egg is copyrighted by 20somethingfinance.com without consent to republish.

The Maximum 401K Contribution in 2011 will be…

Identical to 2009 and 2010. Bummer, dude.

That’s right, the IRS 2011 maximum 401K contribution limit will stay the same as the 2009 401K contribution maximum and the 2010 401K maximum contribution at $16,500. This also goes for 403B and 457B plans. The maximum 401K catch-up contribution per year for those over 50 years old will stay the same at an additional $5,500 over the standard contribution. For reference, the last increase was when 2009′s 401K maximum had increased $1,000 over 2008′s $15,500 maximum. I have to admit, I’m very disappointed to hear this news.

The Sad Part of 401K Maximum Contributions Staying the Same

This news is disappointing when you take into consideration the fact that the maximum contribution level has increased in all but six years going back to it’s beginning in 1987 (almost 3/4 of the time). Now we’ve gone three years without an increase (for the first time in history). It’s also worth noting that in that time period the maximum 401K contribution amount has never declined.

The Ironic Part of 401K Maximum Contributions Staying the Same

Last year, there had been rumblings that the maximum 401K contribution level might actually decrease in 2010 for the first time due to the Consumer Price Index (CPI) decreasing year over year. Thank goodness, it didn’t

But what is ironic about this IRS decision is that the federal government has a very determined effort to keep mortgage rates artificially low right now and has started to use other quantitative easing tactics to increase inflation. At the same time, the value of the dollar has plummeted. Food and gas prices have skyrocketed. Yet no 401K increase? Of course not, the fed wants us to spend that money to stimulate the economy!

Looking to Diversify Beyond your 401K?

Mad that the 401K max limit didn’t increase? Start up a Roth or Traditional IRA. I moved my traditional and Roth IRA to TradeKing, who has zero maintenance fees and trades are only $4.95 (second lowest in the industry behind Zecco’s $4.50). You’ll probably be saving money on fees versus your 401K.

401k Discussion:

• Are you excited, disappointed, or indifferent to this 401K news?
• Do you plan on maxing out your 401K in 2010 or 2011?
• Have you ever maxed out your 401K?

Related Posts:

• 8 Personal Finance Spring Cleaning Ninja Moves!
• 401K Match
• The Complete Guide to Choosing Between a Traditional 401K and a Roth 401K
• Choosing Between a Traditional 401K and a Roth 401K, Part II: How will my Choice Effect Early Retirement?

2011 IRS Maximum Allowed 401k Contribution Announced is copyrighted by 20somethingfinance.com without consent to republish.

What is a Roth 401K?

It’s essentially a combination of some aspects of a Traditional 401K and a Roth IRA. With a Roth 401K, you can contribute the same contribution amounts as a Traditional 401K, only it is is after-tax dollars (like a Roth IRA). Your contributions and your earnings grow tax-free and are not taxed upon distributions or withdrawal in retirement.

What is the Difference Between a Roth 401K Versus a Traditional 401K?

Roth’s 401K’s  are post-tax, traditional 401K’s are pre-tax. Roth contributions are taxed now, Traditional contributions are taxed in retirement. It’s as simple as that.

What is the 2010 Roth 401K Maximum Contribution?

Much like with Traditional IRA and Roth IRA’s, it is a combined contribution total. The IRS Roth 401K maximum contribution level is the same as the Traditional 401(k) contribution maximum – $17,000 for the 2012 tax year.

Are Roth 401K Matching Funds Also Post Tax?

No! This was the biggest question I had when starting a Roth 401K. I thought to myself, “hmmm… if I contribute to the Roth vs. the Traditional, then my matching funds will be higher because they are in after tax dollars”. Nice try. Your employer’s matching Roth 401K contributions are in pre-tax dollars.

This means that a Traditional 401K will be opened for you by your employer, if you didn’t already have one – and pre-tax matching funds will be placed in it. An employer CANNOT contribute after-tax matching funds to your Roth 401K. Bummer, I know.

What is the Roth 401K Catchup Contribution?

Same as the Traditional 401K. You can contribute an extra $5,500 to your Roth 401K (for a total of $22,000) if age 50 or older.

Can a Roth 401K rollover into a Roth IRA?

Yes, much like a Traditional 401K can rollover into a Traditional IRA (or Roth with taxes paid), you can roll over a Roth 401K to a Roth IRA. And you should probably do this whenever you leave an employer because Roth IRA options from discount brokers like Zecco and TradeKing are usually greater, and with lower fees than 401K plans.

Can you Move Money from a Roth 401K to a Traditional 401K?

No. And you’d never want to. Post-tax funds are always worth more than pre-tax funds.

Roth 401K Contributions Withdrawal Rules

You can withdraw before retirement without tax and penalty if your account is at least 5 years old. There are some exceptions, including disability that would allow you to withdraw early without penalty. And there are some funny rules around earnings to contributions, so check with a CFP on this one if you are considering it.

Roth 401K Discussion

• Does your employer offer the Roth 401K?
• Have you signed up for one?
• If you have the option of a Roth 401K and a Traditional 401K, which are you contributing the most to?

Roth 401K Contibution Maximum Contribution & Comparisons to Traditional 401K is copyrighted by 20somethingfinance.com without consent to republish.

So what are some realistic and strategic goals once you reach 30? I’ve been thinking about this a lot lately. The thirties are an interesting time period. Ideally, you start to advance in your career and begin hitting your peak earning years, you may have a house, start a family, and you generally have a completely different set of financial goals than when you do in your twenties.

Much like I did on my twenties post, I’ll cover some basic goals along with goals that would win you extra points. Remember, these are goals to strive for, they won’t be hit by everyone.

1. Retirement: Max Out your 401K

I’ve max out my 401K for the last few years and plan on doing it every year in my thirties. Why max it out? Well, for starters, if you’ve been doing it already, you know what it takes and should have no problem doing it as your income continues to grow. If you haven’t been, your thirties might begin to provide enough of an income for you to consider it. Don’t wait until your 40′s to start savings significantly for retirement. By then, it might be too late to use the power of compounding capital gains to have a huge impact by retirement.

Not sure what the IRS maximum 401K contribution is? Click that link to find out.

• Bonus Points: Starting to contribute to your IRA in your twenties should be a goal. In your thirties, there’s more at stake. In addition to maxing out your 401K, also try to hit your IRA maximum contributions by maxing out your traditional or Roth IRA.

2. Debt: Pay Off All Non-Mortgage Debt

This would include credit cards, auto, and other high-interest unsecured loans as well as student debt. High-interest loans are the equivalent of a dam that’s about to break. It’s starts off as a little drip and as time goes by it turns into a steady stream and finally, it breaks down the wall altogether.

• Bonus Points: Pay off your mortgage. Carrying significant mortgage debt into your forties and fifties leads to you being very dependent on your primary source of income to keep the house, most notably, your day-job. As we all know, hardship can happen anytime. Having to foreclose on a house at that stage of life makes recovery for a comfortable retirement very difficult.

3. Emergency Savings: Maintain an Emergency Fund Equal to One Year’s Worth of Living Expenses

In a span of ten years, the country will probably going to go through an economic recession or two. In such times (and even outside of them), you or your significant other may be at risk of losing your job. You also may become more prone to disease or other medical hardship as you age. When my wife was laid off last year, our emergency savings fund helped save the day. Protecting your future goes a long ways towards peace of mind.

A lot of financial gurus recommend six months worth of emergency savings, but after this recession, I’d feel a lot more comfortable with a year.

• Bonus Points: Earn interest on your emergency fund through a high-yield savings account through an online bank, such as Discover Bank, Everbank, Ing Direct, or Ally Bank.

4. Protect: Protect your Loved Ones with Term-Life Insurance

A lot of us will continue or begin long-term relationships and possibly start families in our thirties. If someone you know is even partially dependent upon your income to live comfortably, then you should be taking a look at covering yourself with a term life insurance policy. Term life insurance is the ‘discount broker’ of life insurance – you cut down on fees and pay for only what you need.

• Bonus Points: Acquire long-term disability insurance as well.

5. Protect your Legacy: Fulfill your Legal Obligations to Others

Create and maintain a living will, living trust, durable power of attorney, and a will. If you are to become medically incapacitated or pass away, these legal documents can protect your loved ones on a financial and emotional level. You owe it to them.

You can go through an attorney to complete these legal documents, but that can be costly, particularly if you frequently update them. I’d recommend checking out Quicken WillMaker Plus 2012, which has fill-in-the blank templates for all four documents and many other legal documents that you might find useful.

• Bonus Points: Don’t die in your thirties. Oh, that’s just wrong, isn’t it? Have a little sense of humor!

Personal Finance Goals for your Thirties Discussion:

• What goals did you create/complete while in your thirties?
• If you’re in your twenties are you a step ahead on completing some of these goals?
• What financial goals do you have for your thirties?

Related Posts:

• 8 Personal Finance Spring Cleaning Ninja Moves!
• How to Improve your Credit Score

5 Personal Finance Goals for your Thirties is copyrighted by 20somethingfinance.com without consent to republish.

To qualify for the Saver’s Credit in 2011:

The AGI (adjusted gross income) limit for the saver’s credit is:

• $56,500 for married couples filing jointly
• $42,375 for heads of household
• $28,250 for married individuals filing separately and for singles

To quality for the Saver’s Credit in 2012:

The AGI (adjusted gross income) limit for the saver’s credit is:

• $57,500 for married couples filing jointly
• $43,125 for heads of household
• $28,750 for married individuals filing separately and for singles

• $55,500 (married filing jointly),
• $41,625 (head of household), or
• $27,750 (single, married filing separately, or qualifying widower)

Update: Here is a full-run down of the 2011 & 2012 Saver’s Credit.

Am I Eligible for the Retirement Savings Contribution Credit?

If you are below the previously mentioned income thresholds, you simply need to make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA). The amount of the saver’s credit you can get is based on the contributions you make and your credit rate (which depends on your income level).

How Much is the Credit Worth?

If you are eligible for the credit, your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income is, the higher the credit rate.

Your credit rate also depends on your filing status. The maximum credit anyone could receive is 50% on a $2,000 contribution (for $1,000), but your total may vary. To figure out exactly how much you can make, use IRS Form 8880, also known as the Credit for Retirement Savings Contributions.

How Can I Claim the Retirement Savings Contribution Credit?

Once you’ve filled out Form 8880, enter the amount of the credit on Form 1040 (PDF), or on Form 1040A (PDF). You cannot use Form 1040EZ to claim this credit. If you’re looking for further information, you can also check out Chapter 5 of IRS Publication 590, Individual Retirement Arrangements (IRAs), for more information.

One last thing – if you are a full-time student for 5 months out of the calendar year, you are not eligible for the credit.

Related Posts:

• 2012 IRS Maximum Allowed 401K Contribution
• 2012 IRS Maximum Allowed IRA Contribution
• Roth IRA Basics
  

What is the Retirement Savings Contributions Credit? Can I Claim it? is copyrighted by 20somethingfinance.com without consent to republish.