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Plethora Of 401(K) And IRA Changes Coming

Aaron Levitt

For many investors, their nest eggs make up their largest portion of investable assets. According to Fidelity Investments, the average 401(K) plan has a balance of $75,900, adding up to almost $1 trillion in retirement money. Add in the nation's individual retirement accounts (IRAs) and you're starting to talk about some serious money.

When any pending legislation or new rules affect these critical savings vehicles, investors should take notice. With that said, t he new year plans to bring some big changes for both 401(K) and IRA accounts. These are changes that will help make it easier for investors to reach retirement milestones with ease. Here's what to expect in 2013.

Higher Contribution Limits
Perhaps the biggest news affecting our retirement accounts in 2013 is how much money we can put away in them. Back in October, the IRS threw savers a bone when it announced it would allow investors, in both 401(K)s and IRAs, the ability to contribute more in each account. Contribution limits will rise by $500 for the year. That means investors in workplace retirement accounts (401(K)s and 403(B)s) will now be able to stash $17,500 away tax deferred. Those using IRAs will now be able to save $5,500.

The reason for these changes has to do with inflation. The IRS uses a factor that takes into account the changes in the Consumer Price Index (CPI). Since inflation has been mild, this was the first contribution increase for IRAs since 2008. Additionally, older workers (age 50 plus) are still able to save extra "catch-up" contributions of $1,000 for IRAs and $5,500 for 401(K)s.

Finally, Fee Disclosures
While most investors know that they pay management fees on the mutual funds, ETFs and unit investment trusts (UITs) with their 401(K), many have no idea just how much they are paying for everything. According to a recent AARP survey, nearly 71% of retirement plan participants do not think they pay any fees. Well, that's about to change. In 2013, the Department of Labor (DOL) is now requiring employers to ensure their clients understand the 401(k) fees that have taken a big bite out of many worker's retirement nest eggs.

The fee disclosures will arrive on quarterly and annual 401(k) statements and show fees/returns compared to a benchmark "plan." If investors work for a large Fortune 500 firm they'll get a plan benchmarked to that index. Likewise, small mom and pop employees will see a comparable index. While there is only a few things investors can do if they think their plan is too expensive, like choose not to participate or push for changes at their HR department, the disclosures will shed light on just how much they may be paying for mediocre or subpar returns. That could prompt more HR departments to choose low-cost index funds in the future.

Increased IRA Limits
Investors with higher incomes have also gotten a few retirement breaks from the IRS as the income phase-outs to receive the tax deduction will go up in 2013. According to the IRS, the cost-of-living index adjustments allow for higher income thresholds for the deductions. That means investors, depending on how they are filing, can earn between $2,000 and $5,000 more in 2013 and still take the deduction.

The CPI adjustment also applies to those investors wanting to get access to a Roth IRA as well. That could be advantageous considering the Roth IRA is made with after-tax money and grows virtually tax free. The higher income limits will allow more people to take advantage for the savings vehicle.

Getting a Reward for Saving Anything at All
Finally, lower- to middle-income workers can also get extra rewards for saving anything for retirement. The Saver's Tax Credit, which is basically a bonus tax deduction worth $1,000 for individuals and $2,000 for couples, is getting a boost via higher income limits in 2013. Couples can earn up to $1,500 more next year and still claim the saver's credit, while single filers can now earn up to $29,500 in 2013. Likewise, heads of household can claim the credit until they earn $44,250. That's roughly $1,125 more than in 2012. The extra credit plus the tax-free power of a Roth IRA can be a portfolio combination for workers.

Get to Saving
For investors, the recent rules changes governing both 401(K)s and IRAs can be seen as a big win for the little guy. At their core, investors will now be able to put away more tax-deferred and tax-free money than ever before. That's good considering our longer life spans and income requirements when we retire.

The Bottom Line
While some people may find it difficult to reach the maximum limits allowed, saving anything is better than nothing. Investors should use the new year as a good starting point to bump up their contributions if they can.

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