2012 401k and IRA Contribution Limits

The IRS made the official announcement for 2012 401k and IRA contribution limits in IR-2011-103. Here are the results:

2011 2012 Increase
Limit on employee contributions to 401k, 403b, or 457 plan $16,500 $17,000 $500
Limit on age 50+ catchup contributions to 401k, 403b, or 457 plan $5,500 $5,500 None
Traditional and Roth IRA contribution limit $5,000 $5,000 None
Traditional and Roth IRA age 50+ catchup contribution limit $1,000 $1,000 None
SIMPLE 401k or SIMPLE IRA contributions limit $11,500 $11,500 None
SIMPLE 401k or SIMPLE IRA age 50+ catchup contributions limit $2,500 $2,500 None
Maximum annual additions to all defined contribution plans by the same employer $49,000 $50,000 $1,000
Highly Compensated Employee definition $110,000 $115,000 $5,000

I will show you how these numbers are calculated.

401k/403b/457 Elective Deferral Limit

The employee contributions are officially known as elective deferrals. The limit on elective deferrals is specified in tax code section 402(g). Tax code section 402(g)(4) talks about how the limit is adjusted for inflation:

“In the case of taxable years beginning after December 31, 2006, the Secretary shall adjust the $15,000 amount under paragraph (1)(B) at the same time and in the same manner as under section 415 (d), except that the base period shall be the calendar quarter beginning July 1, 2005, and any increase under this paragraph which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.”

The limit for 2006 was hard coded to $15,000. Then it adjusts for inflation using the average CPI numbers in the July-to-September quarter from one year to another, but it rounds down to the nearest $500.

The average CPI number for July to September 2005 was 196.87. The Q3 2011 average is 226.452. That’s an increase of 15.0% since 2005. The raw adjusted limit therefore would be $15,000 * 1.150 = $17,250. Round it down to nearest $500 and we get $17,000, up by $500 from 2011.

401k/403b/457 Catchup Limit for Age 50 and Older

The 401k catchup limit for age 50 and older is adjusted similarly. It was hard coded to $5,000 in 2006. It increases with inflation using the average inflation numbers in Q3 each year, but it rounds down to the nearest $500.

$5,000 * 1.150 =$5,750. Round down to the nearest $500 and we get $5,500. No change from 2011.

With the catchup, the 401k/403b/457 contribution limit for a person age 50 or older in 2012 will be $22,500, up by $500 from 2011.

Traditional and Roth IRA Contribution Limit

The Traditional and Roth IRA contribution limit was hard coded to $5,000 for 2008. Then it adjusts for inflation using September-to-August average inflation numbers but it rounds down to the nearest $500.

The average CPI number for September 2006 to August 2007 was 204.9. The same for September 2010 to August 2011 was 222.433, for an increase of 8.56%. $5,000 * 1.0856 = $5,428. Round down to nearest $500 and we get $5,000, no change from 2011.

Traditional and Roth IRA Catchup Limit for Age 50 and Older

The Traditional and Roth IRA catchup limit for age 50 and older was hard coded to $1,000 for 2006. There is no inflation adjustment for the catchup limit.

With the catchup, the IRA contribution limit for a person age 50 or older in 2012 will be $6,000, no change from 2011.

SIMPLE 401k and SIMPLE IRA Contribution Limit

The SIMPLE 401k and SIMPLE IRA contribution limit was hard coded to $10,000 for 2005. Then it adjusts for inflation using Q3 inflation numbers but it rounds down to the nearest $500.

The average CPI number for July to September 2004 was 189.6. The estimated increase since then is 226.452 / 189.6 – 1 = 19.4%. $10,000 * 1.194 = $11,940. Round down to nearest $500 and we get $11,500, no change from 2011.

SIMPLE 401k and SIMPLE IRA Catchup Limit for Age 50 and Older

The SIMPLE 401k and SIMPLE IRA catchup contribution limit for participants age 50 or older was hard coded to $2,500 for 2006. Then it adjusts for inflation using Q3 inflation numbers but it rounds down to the nearest $500.

The average CPI number for July to September 2005 was 196.87. The estimated increase since then is 226.452 / 196.87 – 1 = 15.0%. $2,500 * 1.150 = $2,875. Round down to nearest $500 and we get $2,500, no change from 2011.

With the catchup, the SIMPLE 401k or SIMPLE IRA contribution limit for a person age 50 or older in 2012 will be $14,000, no change from 2011.

Annual Additions to Defined Contribution Plans

The maximum combined employer and employee contributions to all defined contribution plans maintained by the same employer is $49,000 in 2011. Most people aren’t anywhere near this limit because their employer isn’t that generous. It’s relevant to small business owners and high-income professionals with rich plans (for instance investment bankers, doctors, and lawyers).

The annual additions limit was hard coded to $40,000 in 2002. Then it adjusts for inflation using Q3 inflation numbers but it rounds down to the nearest $1,000.

The average CPI number for July to September 2001 was 177.8. The estimated increase since then is 226.452 / 177.8 – 1 = 27.4%. $40,000 * 1.274 = $50,960. Round down to nearest $1,000 and we get $50,000, up by $1,000 from 2011.

Highly Compensated Employee (HCE) Definition

Many employers get around the limit on contributions from “highly compensated employees” (HCEs) by adopting a “safe harbor” provision, which means the employer contributes or matches a minimum amount for everybody. For those employers who still limit contributions by HCEs, the income used in the definition of an HCE is $110,000 in 2011.

The income used in the HCE definition was hard coded to $80,000 in 1997. Then it adjusts for inflation using Q3 inflation numbers but it rounds down to the nearest $5,000.

The average CPI number for July to September 1996 was 157.3667. The increase since then is 226.452 / 157.3667 – 1 = 43.9%. $80,000 * 1.439 = $115,121. Round down to nearest $5,000 and we get $115,000, up by $5,000 from 2011.

Reference:

Consumer Price Index – All Urban Consumers (1982-84 = 100), Bureau of Labor Statistics

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Comments

  1. says

    “The maximum combined employer and employee contributions to all defined contribution plans maintained by the same employer is $49,000 in 2011″

    I know you’re the expert on this stuff, so does that mean you can contribute more than the limit if you participate more than one employer plan? For example max out the $16.5k on one employee plan and also put $49k in a sep-ira/solo 401k plan as self-employed?

  2. says

    Jonathan – That’s correct. The $16,500 elective deferral limit is per-employee across all plans from all employers. The $49,000 limit is per-employer. It is of course still subject to the 20%/25% limit depending on how the self-employment business is organized.

  3. says

    So can anyone explain why there is such a disparity between maximum contributions? Why is an IRA a measly $5k, where a 401(k) is $16.5k? With all the talk of overhauling legislation on retirement plans, and even eliminating them in favor of yet another government run retirement plan why has no one proposed a simple bill to level the playing field among the various plans? My employer’s 401(k) offerings are poor performing and fee laden, but I’m limited in how much I can sock away in my IRA. It’s like I’m being forced to pay higher fees for mediocre performance in my 401(k). It’s very frustrating…

  4. says

    Joe – Congress set these limits. They don’t need a reason. Some people have a good 401k and they are still allowed to contribute to an IRA. If IRA limit is raised to the same as 401k, they would be able to contribute more and pay less tax. Congress is concerned about losing tax revenue.

    It would make sense to make 401k and IRA a combined limit so you will have a choice, but then again, for people who don’t have a 401k today, that would allow them to contribute more, pay less tax, and the government would lose tax revenue. A compromise would be still make it a combined limit but set it lower than today’s max added together — say a combined limit of $19,000 whether you put into 401k or IRA. But as you know, Congress doesn’t always do what makes sense.

  5. Trey Hill says

    Following up on Joe’s question, I just wanted to confirm that we have no understanding of how the limitations of $16.5k and $5k were determined. Was there some calculation, or were those two numbers picked completely at random? I could understand if the two limits were adjusted to account for taxes, but the difference is far too great for that to be the case.

  6. says

    Trey – I already explained how these numbers are adjusted for inflation every year but Congress picked the starting points arbitrarily. 401k limit was hard coded to $15,000 for 2006. Then it adjusts for inflation with some rounding. Why $15,000 for 2006? They just picked that number. Same for the IRA limit. It was hard coded to $5,000 for 2008. They just picked that number.

  7. Grant Farn says

    I’m trying to better understand the $49,000 limit. When I heard about it last year I asked my previous employer’s HR department. They said our plan allowed additional contributions over and above the before tax limit, but that all additional contributions must be made after tax. So I maxed out my before tax contributions and took my after tax contribution up to ~$30,000. What is that after tax contribution called a Roth 401K? I’m now concerned that I’m going to get hit with some unexpected penalty.

  8. says

    @Grant – No, you did it perfectly. Roth 401k takes after-tax money but not all after-tax contributions are Roth 401k. Roth 401k shares the same contribution limit with pre-tax 401k; regular after-tax contributions are extra. Yours were just regular after-tax contributions, not Roth 401k contributions.

    Since you no longer work for that employer, you can do a rollover from the plan. Roll the pre-tax money to a traditional IRA or your current 401k. Roll the after-tax money to a Roth IRA. You only pay tax on the small amount of earnings (if any) on the after-tax money. That after-tax money will grow tax free after the rollover to a Roth IRA.

    I wish more plans would allow regular after-tax contributions as your previous employer’s plan does.

  9. stevo says

    I continue to find the interaction between 403b and SEP IRA plans confusing. I am over 50 and contributed $22,000 (during 2011) to a 403b plan. I am also self-employed and have a SEP IRA plan. What is the maximum I can contribute to the SEP IRA (for tax year 2011)?

    Is it:
    a) $49,000?
    b) $27,000 ($49,000 – $22,000)?
    or, c) ($49,000 – $22,000 + $5,500 over age 50 catch-up)?

    On the IRS website, under the topic “Retirement Topics – 403(b) Contribution Limits” it states:
    “For 2011 and 2012, the total of employer and employee contributions (including the 15-year catch-up discussed below) cannot exceed the lesser of $49,000 for 2011 and $50,000 for 2012 or 100% of includible compensation, plus any age 50 catch-up contributions.”

    The IRS statement makes me think the answer is c). What do you think (and thanks for any insights you can provide on this issue!!!)?

  10. says

    @stevo – For 403b (not 401k), you maximum contribution to your SEP-IRA in 2011 is $49,000 – $22,000 – any money your employer contributed to your 403b + $5,500, subject to the usual cap of 20% of net earnings or 25% of compensation from your self-employment.

  11. Jeff says

    Have a question on the IRA rule that states “Depending on your adjusted gross income (AGI) and whether or not you’re covered by an employer’s retirement plan at work, some, all, or none of your IRA contributions may be tax deductible.” If my wife both have a 401 k plan at work and we max that out (we are over 50) and our AGI for the yr will be over $180,000. then we won’t get the deduction for contributing to an IRA correct? If not, at that point we should put it in a Roth instead? Getting hit with a huge short term capital gains tax this yr that I can not avoid and trying to minimize our other income adding to it.

  12. Mia says

    Can you help with HCE limits calculations (for 2012 it is 115k)
    Is it suppose to be in 5k increments or not? what is a base $ and base year?
    Thanks

  13. says

    Mia – I updated the article. $80,000 in 1996, adjusted for inflation using Q3 averages, rounded down to the nearest $5,000.

  14. Bill says

    So, as an employee, I only have a simple IRA -with a 3% employer match. Does that mean the total contribution for both employee and employer cannot exceed $11,500, or can it go as high as $17,000? Thanks for your patience.

  15. says

    Bill – Up to $11,500 just for the employee contribution. 3% from the employer is extra. The maximum salary considered for the 3% is $250,000.

  16. K.C. says

    I work for the State of Utah as a doctor. I contribute $17000 to my 401k $17000 to my 457. I also have a private practice L.L.C. I contribute 20% of my net to a SEP. I am 42yrs old. My net is over 140k with my private practice. can I contribute $28K to my SEP or am I limited to only 15k by the $49k-$17k-$17k=$15k rule?

  17. says

    K.C. – The 49k is now 50k in 2012. It’s a “per employer” limit. The 457 doesn’t count anyway. If that 401k is really a 401k, not a 403b, it counts against your employer’s limit, not your private LLC’s. You have a full 50k headroom for your private LLC (still limited by 20% of your net of course). If that 401k is actually a 403b, it counts against your limit. In that case, you can do maximum 50k – 17k = 33k.

  18. ted says

    Hi, I contributed 17K to my 457 plan until 9/28. Now I have a new employer and they offer 3% matching on 401K, can I contribute another 17K from now until the end of this year to this 401K?? Thanks

  19. Harry says

    Sir, Here is my situation. My wife and I both work (gross $300K) and contribute 17K each to 403b plans and 17K each to 457 plans at our employers. Please let me know if there are any opportunities other than we already have, to save on taxes.

  20. Don says

    I am a married 56 yr.old earning 1965K/annual. I understand I can contribute up to 17,000 to my company-sponsored 401-K and an additional $5,500 to a 50+ catch-up 401-K for a total of 22,500. Is that the maximum pre-tax contribution I can make? My wife does not work outside the house and we have made no contribution for her.

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