How Will Upcoming Changes to Retirement Plans Affect You?

Liz Davidson
December 22, 2011
DENVER - NOVEMBER 09: Nurse Stephen Van Dyke ...
DENVER - NOVEMBER 09: Nurse Stephen Van Dyke ...

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Recently, one of our planners was discussing retirement planning with a woman in her mid 50's. She was a model saver living within her means, had no debt, and was maximizing her 401(k) contributions (or so she thought). Come to find out, she was contributing $13,000 to her retirement plan but was unaware she could have been setting more aside in her company 401(k).While many people would love to be able to contribute this amount to their retirement plan, this concerned pre-retiree was contributing based on the 2004 limits and was actually able to contribute much more to her 401(k) plan ($22,000 in 2011). With retirement her top concern, she was excited to find out that she could increase her savings and max out her contribution for 2012.She had also turned 50 since her last update to her 401(k) contributions and was now eligible for catch-up contributions in the amount of an additional $5,500. In the meantime, the financial planner helped redirect her excess savings to a Roth IRA providing her a tax-free retirement savings option. The maximum contribution amount of $5,000 ($6,000 for ages 50 or older) provides an excellent savings vehicle and contributions made prior to the tax filing deadline can be made for the 2011 tax year.

Here is a snapshot of some recent updates that impact retirement planning:

Higher 401(k) limits. It is tempting to push life’s “easy button” and put certain aspects of our financial lives on cruise control. Automatic bill pay, systematic investment plans, direct deposit transfers to savings,and 401(k) contributions are perfect examples of how automation can simplify the management of our personal finances. But these same processes can hold us back if we do not update them regularly. For example, the contribution limit for 401(k)s, 403(b)s, and the federal government's Thrift Savings Plan increases to $17,000 in 2012 ($22,500 for those aged 50 or older), up from$16,500 during 2011.

For those currently maxing out contributions, this $500 difference can have a huge impact over time. Over the period of ten years, a $500 additional retirement plan contribution ($41.67 per month) would result in $7,243 added retirement savings based on eight percent hypothetical average annual returns. A few minor updates can help pay for that dream vacation or cover planned expenses during the next chapter of life.

Retirement plans offer improved access to investment advice. When it comes to managing investments, the decision-making process seems to become more complicated during uncertain economic times. The recent Financial Finesse quarterly report indicated only 33% of employees expressed confidence that their investments were allocated properly. The Department of Labor (DOL) recently published new regulations that make it easier to receive investment advice from a plan sponsor and this will hopefully work to improve asset allocation decisions and investor confidence. This should be welcome news for retirement plan participants and plan sponsors as a recent Aon Hewitt and Financial Engines study indicated that employees who used employer-provided investment help outperformed individuals self-directing their 401(k)s by nearly 3 percent annually. The DOL rule becomes effective December 27, 2011. The advice can be delivered through a 401(k) or IRA and the advisor’s compensation cannot vary based on the actual investments selected. Online advice through computer models that are certified by an independent expert as unbiased provide another potential source of investment advice.

Changes are coming to 401(k) fee disclosures. Do you know how much your 401k is costing you? If not, you are definitely not alone. A recent AARP survey indicated that 71 percent of 401(k) participants were unaware of the fees associated with their retirement plan. The need for increased awareness of fees has led the Department of Labor to issue a regulation that requires most 401(k) plans to disclose the fees associated with participation in the 401(k) plan and the costs of each investment option to plan participants. This added transparency and fee disclosure is set to begin by May 31, 2012.

However, you do not have to wait until then to begin analyzing fees that affect 401(k) plans. One way to go ahead and determine the potential impact of your investment fees is to take a look at mutual fund expense ratios. These charges go directly to the company that manage your plan investments and may be listed on your 401(k) plan web site or located on your recent statement.

More companies are reinstating 401(k) matching contributions. If this positive trend continues it will be welcome news for employees on the fence about participation in an employer sponsored retirement plan. According to a Towers Watson surveyof 260 companies that eliminated their matching contributions during the recent recession, seventy-five percent of the companies that suspended their 401(k) match on January 2008 or later have since restored them. The reinstatements are expected to improve retirement plan participation rates as well as employee appreciation of these plans. If your employer has recently reinstated matching contributions, now is a perfect time to review your retirement plan contributions.

IRA income limits have increased. While IRA contribution limits will remain the same in 2012 at $5,000 (6,000 for those aged50 and older), it is important to pay attention to the actual income limits affecting participation in IRAs. The eligibility for contributions to a Roth IRA and deductibility for a traditional IRA are based on certain income limits which are increased for 2012. If you are covered bya retirement plan at work, the tax deduction for traditional IRA contributions are phased out when the modified adjusted gross income is between $58,000 and $68,000 in 2012 ($92,000 to $112,000 for married couples filing jointly), up $2,000 from 2011. If you are without a retirement plan at work but married to someone who does have a plan at work, the income cutoffs will increase by $4,000 to between $173,000 and$183,000 filing jointly. The income limits for contributions to a Roth IRA increase $3,000 ($4,000 for couples) to between $110,000 and $125,000 for singles and heads of household and $173,000 to$183,000 for couples in 2012.

Increased access to the Saver's Credit. In 2012, the Saver's Credit will be available to workers with slightly higher incomes than in previous years. A tax credit worth up to $1,000 ($2,000for couples) can be claimed by those who contribute to a retirement plan such as a 401(k) or IRA and have modified adjusted gross incomes of up to $28,750 for singles, $43,125 for heads of household, and $57,500 for married couples. This increased limit is designed to encourage retirement savings and provides an added incentive to save for retirement if your income falls within these limits.

As the saying goes, sometimes the only constant in life is change. Such is the case with the ever changing landscape of tax and financial planning rules and regulations. Some recent changes may not appear significant, but have an impact on retirement planning. With retirement confidence levels at such dangerously low levels in our country, it is essential that individuals remain proactive and use the upcoming changes for 2012 to their benefit. Even if there weren’t any changes to the limits that affect retirement planning, it makes perfect sense to review retirement plans on a regular basis no matter how far away retirement may seem.