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2015 Contribution Limits For 401(k)s And More

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The Treasury Department issued new IRS guidance to support the expanded use of annuities in defined contribution plans. The guidance makes clear that plan sponsors may offer deferred income annuities in target date investment options that are designated as the default investment in 401(k) and other defined contribution plans.

This guidance demonstrates the Treasury Department’s commitment to, and ongoing support for, making lifetime income more accessible in workplace retirement plans. The announcement, which follows on the heels of the Treasury’s qualifying longevity annuity contract rule, is the latest move to help ensure that American workers and their families can attain guaranteed retirement income that cannot be outlived.

By continuing to break down access barriers and providing plan sponsors with this clear guidance, the Treasury Department is acknowledging the important part annuities have in helping Americans attain financial security in retirement.

The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2015, and this year there’s extra room for savings for wage and salary types and the self-employed. If you have a 401(k), a SEP-IRA, or a SIMPLE, pay attention and if you can swing it, bump up your contributions to the new max. You can stuff $18,000–or $24,000 if you’re 50 or older–into a 401(k), for example. Here are the details.

401(k)s. 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.

The 401(k) Catch-Up. The catch-up contribution limit for employees age 50 or older in these plans goes up to $6,000 for 2015, up from $5,500. Even if you don’t turn 50 until Dec. 31, 2015, you can make the additional $6,000 catch-up contribution for the year.

SEP IRAs and Solo 401(k)s. For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $52,000 in 2014 to $53,000 in 2015. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the new compensation limit used in the savings calculation is $265,000, up from $260,000.

The SIMPLE IRA. The contribution limit on SIMPLE retirement accounts for 2015 is $12,500, up from $12,000 in 2014. The SIMPLE catch-up limit is $3,000, up from $2,500 in 2014.

Defined Benefit Plans. The limitation on the annual benefit of a defined benefit plan remains unchanged at $210,000 in 2014. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.

IRAs. The $5,500 limit on annual contributions to an Individual Retirement Account remains the same for 2015, the third year in a row. Blame low inflation. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000.

Deductible IRA phase-outs. You can earn a little more in 2015 and get to deduct your contributions to a traditional pre-tax IRA. Note, even if you earn too much to get a deduction for contributing to an IRA, you can still contribute; it’s just non-deductible.

In 2015, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $118,000.

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is 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 an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA phase-Outs. In 2015, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, 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, up from $114,000 to $129,000.

If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions..

The Saver’s Credit. The 2015 AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,000 for married couples filing jointly, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for singles, up from $30,000.

Beneficiary Designations: Establishing the right beneficiary designation in your IRA has never been more important.  This summer, the Supreme Court of the United States ruled unanimously that inherited IRAs are NOT retirement accounts, and it is now the law of the land.  An “inherited IRA” is one you received because you were listed as a beneficiary on someone else’s IRA or retirement plan.

All IRA distributions are taxable regardless of the reason for the distribution. If you inherit an IRA worth $100,000 and lose it to a creditor, you not only lose the IRA but you will have to pay tax on the entire $100,000 as well.

If the beneficiary is someone other than your spouse, the court has ruled that those assets could be subject to creditors in a bankruptcy. Presumably this would also include cases in which the IRA beneficiary was sued for financial damages in civil court. In either case, if your beneficiary is vulnerable to creditors or a law suit you may want to rethink your beneficiary designation or consider other alternatives.

Inherited IRAs are NOT retirement accounts for the following reasons:

  • Beneficiaries cannot add money to inherited IRAs like they can to other retirement accounts.
  • Inherited IRA beneficiaries must begin taking distributions the year after they inherit the account — even if they are not anywhere near retirement age.
  • Inherited IRA beneficiaries may take distributions prior to age 59 and a half without any penalties.

While this ruling applies specifically to inherited IRAs, it is unclear if it applies only to IRAs inherited by a non-spouse beneficiary (child, grandchild, etc.) or if it also includes IRAs that pass to a surviving spouse., it’s unlikely that the new ruling would apply to spouses and even if it did, spouses have the right to roll the IRA they inherited from a deceased spouse into their own IRA.

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Saturday, November 1st, 2014 Wealth Management

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