2013 Inflation Adjustments and Pension Plan Limitations: A Comprehensive Guide

Pension planning can be overwhelming, especially when you consider the complicated rules and limitations that come with it. One crucial aspect of pension planning is understanding the inflation adjustments and pension plan limitations that will govern your retirement savings. These rules can affect how much you can contribute to your pension plan, how much income you receive from it, and how much tax you pay on the amounts involved.

In this article, we’ll explore all you need to know about inflation adjustments and pension plan limitations in 2013. We’ll investigate the changes made to these rules, delve into the numbers, and examine their impact on pension planning.

Overview of Inflation Adjustments

Inflation adjustments are changes made annually to account for the changes in the cost of living. These adjustments are intended to ensure that taxation, retirement plans, and other national benefits keep pace with inflation. In 2013, the following inflation adjustments were made:

Income Tax Brackets and Rates

The federal government uses income tax brackets to tax individuals at different rates based on their earning. In 2013, these brackets were adjusted upward with rates remaining as they were in 2012, as shown in the table below:

Marginal Tax Rates* | Single | Married Filing Jointly |
— | — | — |
10% | Up to $8,925 | Up to $17,850 |
15% | $8,926 to $36,250 | $17,851 to $72,500 |
25% | $36,251 to $87,850 | $72,501 to $146,400 |
28% | $87,851 to $183,250 | $146,401 to $223,050 |
33% | $183,251 to $398,350 | $223,051 to $398,350 |
35% | $398,351 or more | $398,351 or more |

*Marginal tax rates only apply to the income within the listed bracket.

Standard Deductions

The IRS sets Standard Deductions for taxpayers who don’t itemize. People aged 65 and above or those who are blind are provided with an additional standard deduction. The standard deduction for 2013 increased from $5,950 to $6,100 for single filers and from $11,900 to $12,200 for married filing jointly.

Personal Exemption

A taxpayer can claim a personal exemption to decrease their taxable income. This exemption was $3,800 in 2012 but increased to $3,900 in 2013.

Social Security Taxable Wage Base

Social Security tax is levied on both employees and employers to fund Social Security benefits. The wage taxable base increased from $110,100 in 2012 to $113,700 in 2013. The tax rate stayed the same, at 6.2% as an employee and 6.2% as an employer.

Retirement Plan Limitations

The government has set limits to the amount of contribution an individual can make to their pension plan without incurring taxes. There are also limits on how much of your income you can receive from a pension plan tax-free. In 2013, some of these limits increased, while others remained the same.

Contribution to Retirement Accounts

401(k) contribution limit increased from $17,000 in 2012 to $17,500 in 2013. The amount an employer can add to an employee’s 401(k) account within a year stayed unchanged at $51,000. The catch-up contribution limit for employees aged 50 years and older also remained the same at $5,500.

IRA contribution limits improved for individuals who also participate in an employer-sponsored retirement plan. If their modified AGI is below the $59,000 – $69,000 range for singles ($95,000 – $115,000 for married couples), a $5,500 contribution may be made ($6,500 if aged 50 years or older). If married and filing jointly, with a modified AGI of between $95,000 and $115,000, the phase-out varies.

If only one spouse is an active participant in an employer-sponsored plan, with a modified AGI of between $181,000 and $191,000, a full contribution of $5,500 ($6,500 if aged 50 years or older) can be made. If both spouses are active participants in an employer plan, the phase-out chart breaks down as follows:

Modified AGI | 2012 | 2013 |
— | — | — |
$95,000 – $115,000 | $92,000 – $112,000 |
$115,000 – $125,000 | $112,000 – $127,000 |

Limits of Contributions to Cash Balance Plans and Defined Benefit Plans

In 2013, there was a rise in the defined contribution limit from $50,000 in 2012 to $5,500 in 2013, with an extra $1,000 for individuals aged 50 years or older.

There were no changes to the defined benefit limits in 2013. These plans don’t allow an individual to make contributions, but they do require companies to contribute an amount every year to provide employees with a certain level of benefits upon retirement.

Modified Adjusted Gross Income Limitations for Roth IRA Contributions

If you have a Roth IRA or are considering opening one, it is worth noting that there are income-based eligibility requirements. In 2013, Roth IRA contributions were limited or entirely phased out for those whose Modified Adjusted Gross Income (MAGI) exceeded specific limits.

If you’re a single filer and your MAGI is between $112,000–$127,000, your contribution to a Roth IRA is partially phased out. For married couples filing jointly, this same phase-out applies if their MAGI lies within the range of $178,000–$188,000.

For 2013 Inflation Adjustments: Tax Credits and Deduction Adjustments

There were some deductions and tax credit increases in 2013 as well.

Adoption Credit

In case you’re thinking of adopting a child, It’s worth noting that the maximum adoption credit increased from $12,650 in 2012 to $12,970 in 2013.

Earned Income Tax Credit

For low- and moderate-income families, the Earned Income Tax Credit (EITC) is a helpful tax benefit. For 2013, families with low to moderate incomes may qualify for an EITC of up to $6,044.

Lifetime Learning Credit

This credit benefits families who pay for higher education for themselves, their spouses, or their dependents. It allows a maximum credit of $2,000 for expenses connected to authorized tuition and fees. In 2013, the income phase-out limits increased slightly for single filers, but stayed the same for those married filing jointly.

Final Thoughts

Understanding the 2013 inflation adjustments and pension plan limits can be overwhelming. However, with a little research, you can gain the knowledge needed to make informed decisions that will ensure maximum benefit from your pension plan. Keep in mind that rules and regulations change from year to year, but it is essential that you stay up-to-date with the current limits and account for inflation when planning your retirement savings.

The government websites are an excellent resource to find detailed information about the 2013 updates and plan for your retirement correctly. By understanding these 2013 inflation adjustments and pension plan limitations, you can maximize your pension contribution and ensure a secure financial future.

On October 18, 2012, the Internal Revenue Service announced the increase of certain tax benefits because of inflation adjustments and 2013 pension plan limitations.  The increased tax benefits are listed below:

-annual exclusion for gifts increased to $14,000 from $13,000 in 2012
-amount for unearned income on child’s tax return for the “kiddie tax” increased to $1,000 from $950 in 2012
-foreign earned income exclusion increased to $97,600 from $95,100 in 2012

Limitations on pension plans and other retirement items underwent cost-of-living adjustments for the 2013 tax year as well, while some stayed the same.  Some of the adjustments and unchanged adjustments are listed below:

-the limit for a deferral based on contribution to 401(k), 403(b), some 457, and the federal government Thrift Saving Plan increased to $17,500 from $17,000 in 2012
-the “catch-up” limit for workers over the age of 50 participating in a 401(k), 403(b), some 457, and the federal government Thrift Saving Plan did not change and remains at $5,500
-deductions to a standard IRA for a single person or a head of household that is also covered by a workplace retirement plan now apply to qualified workers who make between $59,000 and $69,000—up from $58,000 and $68,000 in 2012
-the deduction for the standard IRA also applies to married couples filing jointly, and the range is $95,000 to $115,000—up from $92,000 to $112,000 in 2012
– the deduction for the standard IRS applies to an IRA contributor who is not covered by a workplace retirement plan and makes between $178,000 and $188,000—up from $173,000 to $183,000 in 2012

There are other changes to deductions and inflation adjustments as well.  In order to understand what deductions to qualify for in the 2013 tax year, speak with a tax specialist.

Source: Internal Revenue Service