IRS Posts New Limits for 2015 Retirement Plan Contributions
October 24, 2014 by Ann Marsh
The IRS has released its new contribution levels for tax-deferred savings plans in 2015 — and the higher dollar figures may mean more to clients right now than in other years.
That’s the message from CFP/CPA Karl Schwartz, a Miami-based advisor with Hewins Financial Advisors, who chalks the greater impact up to slow wage growth.
Key for advisors, he says, is to “be aware” of changes in your clients’ lives. “You might have a client who’s just turned 50 years old this year. Instead of doing the basic 401(k) contribution, they can now do the catch-up amount. That can really help someone out in putting money away so that they can have enough money one day in retirement.”
The new IRS rules for the 2015 tax year, released Thursday, include higher contribution levels for a host of tax-deferred savings plans, as well as increased maximum income levels for investors who might want to use these plans and other strategies.
KEY RULE CHANGES
Here are a few rule changes that advisors should pay particular attention to.
- Clients may now put $18,000 (up from $17,500) into 401(k), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan.
- Clients aged 50 and older can also make “catch-up” contributions of $6,000 annually, increased from $5,500, into these plans.
- The phaseout range on deductions for singles and heads of household who are contributing to traditional IRAs and are already covered by workplace retirement plans has changed: The phaseouts affect taxpayers with modified adjusted gross income between $61,000 and $71,000 (up from $60,000 to $70,000 last year).
- The phaseout thresholds also have increased for married clients with one or the other spouse contributing to IRAs, while also contributing to workplace retirement plans. (The full list of rule changes is on the IRS website.)
- For Roth IRAs, income phase-out ranges have increased, across all the above taxpayer profiles.
SAVER’S CREDIT
Schwartz even thinks the “saver’s” tax credit — aimed at low- to moderate-income households — could help some high-net-worth families.
The credit applies to married clients filing jointly who have income up to $61,000 (increased from $60,000 this year); different levels are set for single clients and those married but filing separately. If those clients contribute up to $5,000 to an IRA, Schwartz says, they will not only benefit from the tax-deferred savings, but will also get a tax credit that will decrease their taxable income by a percentage based on their income level.
This strategy could be helpful for entrepreneurial clients, who tend to have many of their assets and income tied up in a business, Schwartz says — or for high-net-worth clients who may have low income levels in a given year. “It can be real powerful for someone in this income range,” Schwartz says.
HIGH-INCOME ADVANTAGES
Even when high-income clients can’t take a tax deduction for IRA contributions, Schwartz says, they may still want to make them. He cites two reasons: the tax-deferred growth of their investments and the ability to convert the amount they contribute to a Roth IRA.
“Doing the traditional $5,000 contribution to an IRA and converting to a Roth is sort of a back-door way for getting into a Roth” for people with higher incomes, Schwartz says. It may be worth it, he adds, “because the Roth IRA is so powerful.”
He added one caveat, however: “Say each spouse has a 401(k) and you don’t have any other investments, this is something you can easily do. But, if you have other outside IRA balances, those will be factored into this equation and it may not work this smoothly.”
