The IRS just released new retirement account contribution limits for 2015 due to an increase in the average of cost-of-living. So what changed, how does this affect you, and how can you take advantage of it?
The New Retirement Account Contribution Limits for 401(k), 403(b), Thrift Savings Plans, and Most 457 Plans
For these plans, the contribution limit has been increased from $17,500 to $18,000.
If you’re not sure if this applies to you, here are brief descriptions of each plan:
- A 401(k) is a retirement plan offered by an employer in the private sector.
- A 403(b) is a retirement plan for employees who work at certain non-profit institutions.
- The Thrift Savings Plan was established by Congress in the Federal Employee’s Retirement System Act of 1986, and it’s offered to current or retired Federal employees. Essentially, it was created to be a counterpart to the 401(k) for those working in the government.
- A 457 plan is a retirement plan for state and local government employees.
Under all of these plans, money is taken out of your paycheck and contributed directly to the account you have. These contributions are only taxed once you withdraw the funds in retirement.
If you’re 50 or older, and participate in the above mentioned plans, you’re eligible for “catch-up” contributions. This limit has increased from $5,500 to $6,000, which means you can save up to a total of $24,000 ($6,000 catch-up + $18,000 limit).
Are you over 50 and wondering what “catch-up” contributions are? Since you’re closer to the traditional age of retirement, the government allows you to contribute more. If you didn’t make contributions early on, this is your chance to save as much as possible before retiring.
Unfortunately, Individual Retirement Accounts did not meet the threshold for the cost-of-living increase, so contribution limits remain unchanged.
As a refresher, the contribution limit is $5,500, and if you’re 50 or older, the catch-up contribution stays at $1,000 (for a total of $6,500).
Unfamiliar with IRAs? In simple terms, traditional IRAs offer tax-deductible contributions. Roth IRAs don’t. Instead, Roth contributions are taxed immediately, but withdrawals are tax-free.
As alluded to in the name, Individual Retirement Accounts are up to individuals to open -- they aren’t offered by employers. You should make use of them if you’re working for a company that doesn’t offer a retirement plan, though you can still open an IRA even if you contribute to an employer plan.
Increased IRA Income Limits
For singles and heads of household covered by workplace retirement plans that also contribute to a traditional IRA, the phase out begins with modified adjusted gross incomes (AGI) between $61,000 and $71,000. This is a $1,000 increase over the limit from 2014.
For married couples filing jointly, where the spouse who contributes to the IRA is covered by a workplace retirement plan, phase-out range is $98,000 to $118,000. In 2014, these limits were $96,000 to $116,000.
For IRA contributors not covered by a workplace retirement plan, but are married to someone who is covered, the deduction is phased out when a couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000 in 2014.
For a married individual filing separately, who is also covered by a workplace retirement plan, the phase-out range remains unchanged ($0 to $10,000).
Increased Roth IRA Income Cut-offs
For married couples filing jointly, the AGI phase-out range is $183,000 to $193,000, up from $181,000 to $191,000 in 2014.
For singles and heads of household, the income phase-out range is $116,000 to $131,000, increased from $114,000 to $129,000.
The Saver’s Credit
If you’re a low to moderate income taxpayer, you should look into the saver’s credit. Its purpose is to give a tax break to those who earn less but still work to save for retirement.
For low or moderate income workers who are married and filing jointly, the AGI limit is $61,000, a $1,000 increase from 2014. For heads of household, the AGI limit is $45,750, which has increased by $750 from 2014. For both singles and married individuals filing separately, the AGI limit is $30,500, up by $500 from 2014.
Are you wondering exactly what “phased out” means? It refers to the gradual reduction of a taxpayer’s eligibility to contribute to a tax-advantaged retirement account as the taxpayer approaches an income limit.
In this case, income limits have been increased, so phase-outs are occurring slightly later on.
All of these IRS changes are welcome news for those dedicated to maxing out their retirement contributions. And if you're not contributing the new (or even the old) max yet? Consider this your invitation to start bumping up what you put in!
Start by increasing your contributions by just a percentage or two. Then, with every pay raise, contribute half of it to retirement accounts and add the other half to your monthly budget.