The IRS released the 2013 IRA contribution limits on October 18 and validated the forecast below. You can read all about the updates here.
There is a small but dedicated group of retirement savers out there, and if you’re reading this post I bet you’re one of them or aspiring to be. Only 22% of Americans have an IRA, and of those only 38% are contributing the maximum contribution each year. That means that if you’re maxing out your IRA each year you’re among a select group of 8% of Americans committed to investing in their retirement future. Saving for retirement doesn’t come easy – it takes years of dedication to generate the avalanche of compounding interest necessary to create a comfortable nest egg.
I’ve forecast the contribution limits for 401(k) plans for the past several years, and this year I’ve decided to expand my analysis to include forecasts for Traditional and Roth IRA’s as well. So what are the factors at play that will impact the 2013 IRA maximum contributions?
How are IRA Contribution Limits Calculated?
At the risk of boring everyone to death, I’ll give a brief overview of how the contribution limits calculations work. After reviewing the relevant legislation, cost of living adjustments for IRA’s are calculated slightly differently than those for other plans. Basically you take the percentage increase of the 12-month average of the Consumer Price Index ending August 31st 2012 divided by the same period in 2007. You take this percentage increase and multiply it by the previous contribution limit ($5,000) and then round down to the next $500 multiple. Based on the first 11 months of data, the CPI average is 224.61. Divide this by the 2007 base (202.77) and you get 1.1056, which essentially means that prices have increased 10.6% since 2007. Multiply that by $5000 and you get $5,528. Rounding down to the next lowest multiple of $500 results in $5,500 which represents a $500 increase in the contribution limit over the current year.
I forecast that the IRA contribution limits (for Traditional and Roth IRA’s) will increase from $5000 to $5500 because the Consumer Price Index (CPI for short) will have risen enough to exceed the threshold needed to trigger an increase. There is only 1 month of additional data that will be factored into the calculation so my confidence is pretty high that this is where we will net out. This would be the first increase in the IRA or Roth IRA contribution limits since 2008 (which were mandated by law and not by cost of living calculations).
Sources: Bureau of Labor Statistics, Economic Growth And Tax Relief Reconciliation Act Of 2001 Sec. 601, TIAA-CREF Survey