Higher 401(k) Contribution Limit in 2012

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Last Updated Oct 21, 2011 10:22 AM EDT

Your New Year's resolutions for 2012 should include increasing contributions to your 401(k) plan account.

In 2012 you can now contribute $17,000 annually from your pay into your 401(k) plan. The increase, which is required by law to adjust for inflation, is $500 higher than this year's level. The 401(k) elective contribution limit has not been increased since 2009, because inflation had been too low to prompt an increase.

And if you're over 50 at any time in 2012 (even if you turn 50 on December 31st 2012), you can contribute an additional catch up contribution of $5,500, for a total of $22,500.

But surveys of retirement plan participants show that only about five percent of about 60 million 401(k) plan participants contribute the maximum allowed to their 401(k) plan accounts.

Making these contributions is more affordable than you think. When you make 401(k) contributions from your pre-tax pay, this will reduce the taxes taken from each paycheck. So while contributing $17,000 a year may sound like a lot of money, it's only about $210 per week after the tax savings are factored in. Another way to look at it is that when you make pre-tax contributions of $17,000 to your 401(k) plan, you can save approximately $6,000 in federal and state income taxes each year.

Saving money on income taxes is more important than ever, especially when you consider that workers in 2012 will also pay Social Security tax on more of their income. In 2012, the amount of earnings fully subject to the Social Security tax - the so called 2012 Social Security wage base - will also rise from $106,800 to $110,100. This means that workers who earn over these limits will pay an additional $200 per year in Social Security taxes.

If you can't afford to make the maximum contributions allowed 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.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.