IRS: Retirement contributions same for 2010

DES MOINES -- The maximum contribution limits for your 401(k) and other retirement plans will stay the same next year, the IRS says.

The agency released a statement Thursday keeping the maximum contribution rate at $16,500 instead of lowering it, as some had feared.

Retirement plan advisers said a lower contribution limit would send the wrong signal to investors who already largely do not save enough.

The maximum contribution is established by using a formula tied to the third-quarter Consumer Price Index for all urban consumers -- the CPI-U. This year the CPI-U fell 1.3 percent over the past 12 months.

The IRS said procedures in the Social Security Act for adjusting benefit amounts do not allow it to reduce limits.

The CPI-U measures the average change in the prices of goods and services including food, clothing, shelter, fuel, drugs and other day-to-day items bought by U.S. urban consumers. It is released by the U.S. Department of Labor.

The falling index meant that for the first time ever the Internal Revenue Service was faced with the possibility that the maximum contribution level -- now at $16,500 -- could have been lower than the year before.

The agency, however, concluded the law did not allow for a lower limit.

A lower limit could have discouraged workers at a time when they should be saving more, said Jacque Mohs, a vice president at Des Moines-based Principal Financial Group. Inc., a leading 401(k) provider.

"We think now is not the time to cut back, it is time to continue to save more for retirement," she said. "Especially in a market recovery time. You don't want to be out of the market. Now is the time to invest and have some of that dollar cost averaging."

Dollar cost averaging is the practice of investing a fixed amount at regular intervals regardless of whether the market is moving up or down, spreading out risk associated with market movement.

The IRS also said it was retaining many of last year's tax deductions, some of which also are determined by inflation figures.

Several deductions for 2010 are unchanged and others change slightly. They include:

--The value of each personal and dependency exemption available to most taxpayers is $3,650, unchanged from 2009.

--The new standard deduction for heads of household is $8,400, up from $8,350 in 2009. For other taxpayers, the standard deduction remains unchanged at $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.

--Various tax bracket thresholds will see minor adjustments. For example, for a married couple filing a joint return the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $68,000, up from $67,900 in 2009.

--The annual gift tax exclusion remains unchanged at $13,000.