How the IRS Can Help You Save More For Retirement in 2015
November 17, 2014It has often been said that the only constant in life is change. As a parent, I find that change is both exciting and scary as heck because you never know what lies around the corner. This statement about anticipating change definitely remains true when the IRS is concerned.
But unlike parenting young children, where you can always expect the unexpected, the IRS changes are tied to a cost-of-living index and these adjustments are somewhat more predictable. Each year, the IRS announces changes to the tax code that have an impact on our personal financial planning. Sometimes it’s easy to let these often subtle changes occur without updating our savings. However, the best approach is to keep our financial plans up to date with these seemingly small changes that can have a big effect on our long-term finances.
The recent announcement of cost-of-living increases will change the dollar amount of contributions to retirement plans. Therefore, if you have a 401(k) and can afford to increase your contributions to the max you, can give your retirement savings an extra boost next year. Here is a summary of the upcoming changes that may impact your personal financial plan:
401(k) limits will increase in 2015. The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, is $18,000 for 2015, up from $17,500 in 2013 and 2014.
401(k) catch-up amounts are also going up in 2015. The catch-up contribution limit for employees age 50 or older will also increase to $6,000 for 2015, up from $5,500 this year. It is also important to note that even if you do not turn 50 until December 31, 2015, you can make the additional $6,000 catch-up contribution for the entire year.
The IRA contribution limit stays at $5,500 for 2015. The catch-up contribution amount remains at $1,000 for individuals age 50 or older. Thanks to low inflation rates, these contribution amounts remain unchanged for the third consecutive year.
The income phase-out amounts for deductible IRAs will increase. This means that people can now earn a little more and still qualify for tax-deductible contributions to a traditional pre-tax IRA even if they are covered by a retirement plan at work. For the 2015 tax year, the ability to make deductible IRA contributions is not an option if you are a single filer with modified adjusted gross income (MAGI) of $71,000 or more ($118,000 for married couples filing jointly). Single individuals will see this contribution limit phased out at income levels between $61,000 and $71,000. Married couples have a phase-out range with income in the $98,000 to $118,000 range. If you’re married filing jointly with a spouse covered by a plan but you’re not, you can also make deductible IRA contributions if the MAGI is below $193,000. IRA deductions are phased out if the couple’s income is between $183,000 and $193,000.
Roth IRA income phase-out limits are also increasing. The maximum amount you can contribute to a Roth IRA remains $5,500 in 2015 ($6,500 for ages 50 or older). One of the main features of the Roth IRA is that your money grows tax-free. Anyone of any age with earned income can contribute to a Roth IRA, provided that they meet the following income limitations for 2015:
- Single filers and those filing as head of household must have modified adjusted gross income below $116,000. If income falls between $116,000 and $131,000, a partial contribution is allowed. No contribution is allowed for those with incomes over $131,000.
- Joint filers must have modified adjusted gross income below $183,000. If income falls between $183,000 and $193,000, a partial contribution is allowed. No contribution is allowed for those with incomes over $193,000.
The retirement savings contribution credit AGI limits are going up. Last month, I wrote this blog post about how the IRS can help you save for retirement with a tax credit. The amount of Retirement Savings Contribution Credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A). In 2015, the credit is available for married couples filing jointly with adjusted gross income (AGI) under $61,000 and single filers and married individuals filing separately with income below $30,500. Head of household filing status can use the credit as long as the AGI is below $45,750.
As the end of the year approaches, it is important to make the necessary updates to your financial plan. Why wait until next year to plan for 2015? Even if you aren’t able to max out your 401(k) contributions next year or contribute $5,500 to an IRA, take the time to review the amount that you can commit to saving for retirement. The only constant in life may be change, but if we don’t take the time to change our financial behaviors, real change in our retirement outlook may be difficult to attain.