Good news for retirement savers: The IRS announced last Thursday that it was increasing contribution limits for most defined contribution plans and Individual Retirement Arrangements. Participants in employer plans will be allowed to defer up to $17,500 in 2013, an increase of $500 from this year. The increase in allowable deferrals applies to 401(k), 403(b), and most 457 plans and is a welcome if modest improvement.
The maximum contribution to an IRA account ratchets up to $5,500 next year.
The retirement plan landscape has changed dramatically over the past generation. The modern defined contribution plan was created in 1981 when the IRS formalized rules for salary deferral and employer matching provisions under section 401(k) of the internal Revenue Code. However, at that early date most of these plans were supplemental to an employer’s basic defined benefit (pension) plan, and very few employees had a stand-alone 401(k) as their sole retirement option.
As defined contribution plans gained in popularity and concerns about budget deficits magnified, Congress acted in 1982 to reduce the total annual contribution limit from $45,475 to $30,000. This limit stood until 2001, when the Economic Growth and Tax Relief Reconciliation Act indexed the yearly
maximum contribution for inflation, and also loosened the limits on employee deferrals to allow for larger participant contributions.