Good News: Contribution Limits For 401(k)s And Other Qualified Retirement Plans Will Rise In 2012 Along With Social Security Benefits

As we noted earlier this week, Social Security benefits will increase by 3.6% in 2012, with commensurate growth in the yearly wage base for Social Security tax (from the current $106,800 to $110,100 in 2012). On October 20, the IRS announced other cost-of-living increases in the amounts that can be contributed to qualified retirement plans, such as 401(k) plans. For example, the elective deferral contribution limit for employees who participate in 401(k)s, 403(b)s, most 457 plans, and the federal government's Thrift Savings Plan will grow from $16,500 to $17,000 in 2012. However, the yearly ceiling on additional catchup contributions for people aged 50 years or more will stay at $5,500.

The annual compensation limit that can be used for calculating the contributions under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) will rise from $245,000 to $250,000. The ceiling for defined contribution plans under Section 415(c)(1)(A) is also going up in 2012, from $49,000 to $50,000. Anyone wanting to contribute more will have to use a nonqualified deferred compensation plan. One of the benefits of a nonqualified plan is that you can contribute much higher amounts toward retirement than you can under qualified plans, such as a 401(k).