The IRS has announced cost-of-living adjustments to the limitations for retirement plan contributions for tax year 2015. These COLA adjustments are incremental, but the higher limitations provide an opportunity for savers to accelerate pre-tax contributions to several different types of qualified retirement accounts.
The new rules also provide financial advisers with a great opportunity to remind clients about the importance of saving for retirement. During the Great Recession, far too many middle-aged Americans were forced to delay or discontinue their retirement saving efforts. In the “Survey of Household Economics and Decisionmaking,” commissioned in 2013 by the
Federal Reserve Board, 31% of non-retired respondents reported having no retirement savings or pension, including 19% of respondents between the ages 55-64. According to AARP, the median retirement account balance in the U.S. is just $3,000 for working-age households. These troubling statistics do not bode well for future retirees.
To encourage more workers to save for retirement, advisers can educate clients about the benefits of contributing to a qualified retirement plan.
First, participants in tax-deferred retirement plans enjoy substantial tax-savings for every qualified contribution they make. For example, next year an employee age 50 or older will be able to make pre-tax contributions of as much as $24,000 ($18,000 plus a $6,000 catch-up contribution) into some of the more common types of qualified retirement plans. If the participant is in the 28% federal income tax bracket, he or she will save $6,720 in federal income taxes.
Second, the money in the retirement savings plan can be invested and grow on a tax-deferred basis until withdrawals are made in retirement. And finally, if the participant's employer makes a matching contribution, the participant's account receives an immediate boost equal to the employer's matching contribution.
Here are some of the highlights of the new retirement plan limitation rules for 2015:
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Also, the income phase-outs for deductible IRA contributions will be slightly increased next year. The deduction for taxpayers making contributions to a traditional IRA will be phased-out for single taxpayers and heads of household who are covered by a workplace retirement plan and have modified adjusted gross income (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014.
For married couples filing jointly, where one spouse who contributes to an IRA is covered by an employer sponsored retirement plan, the income phase-out range will be $98,000 to $118,000, up from $96,000 to $116,000 in 2014. For an IRA contributor who is not covered by an employer sponsored retirement plan, but is married to someone who is covered by a workplace plan, the deduction is phased-out if the couple's income falls between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to a COLA adjustment and remains at $0-$10,000.
The AGI phase-out range for taxpayers making contributions to a
Roth IRA will be $183,000 to $193,000 for married couples filing jointly next year, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range will be $116,000 to $131,000, up from $114,000 to $129,000. For a married taxpayer filing a separate return, the phase-out range is not subject to a COLA adjustment and remains at $0-$10,000. For a married individual filing a separate return, the phase-out range is not subject to a COLA adjustment and will remain at $0-$10,000.
For additional COLA related adjustments affecting other retirement plan items, see the latest
IRS information release.
Richard Behrendt, a former IRS attorney, is director of estate planning at Annex Wealth Management, headquartered in Elm Grove, Wis.
