(MoneyWatch) Your financial plans for 2013 should include increasing contributions to your 401(k) plan account.
Next year you can contribute $17,500 annually from your pay to a 401(k) type retirement plan. This retirement plan contribution limit, which is required by law to be indexed to inflation, is $500 higher than this year's level. The contribution limit last increased in 2011 and is rising now because of automatic inflation adjustments.
If you're over 50 at any time in 2013 (even if you turn 50 on Dec. 31, 2013), you can contribute an additional amount -- called catch-up contributions -- up to $5,500. This special contribution limit remains unchanged from the 2012 limit. That means workers age 50 or older in 2013 cam make a total contribution of $23,000 to their retirement plan accounts.
Surveys of retirement plan participants continue to show that only about 5 percent of the 60 million 401(k) plan participants make the maximum contributions.
Making these contributions is more affordable than you think. When you make 401(k) contributions from your pre-tax pay, it reduces the taxes deducted from each paycheck. So while contributing $17,500 a year may sound like a lot of money, it's only about $215 per week after the tax savings are factored in. Another way to look at it is that when you make pre-tax contributions of $17,500 to your 401(k) plan, you can save approximately $6,400 in federal and state income taxes each year.
Saving on income tax is more important than ever, especially when you consider that workers in 2013 will also pay higher Social Security taxes on their income. The amount of earnings fully subject to the Social Security tax -- the so-called Social Security wage base -- will also rise from $110,100 to $113,700. This limit is indexed to a measure of price inflation. That means workers who earn over these limits in 2013 will pay an additional $275 per year in Social Security taxes.
If you can't afford to make the maximum contributions to your retirement account, then at least make sure you are putting in enough money to take full advantage of your company match. A company match is like getting free money, so don't pass it up.