The IRS announced in October 2014 new limits and adjustments that affect a wide range of retirement and pension plans for 2015. These new limits were prompted by an increase in the cost-of living index. Each year the IRS reviews the inflation indicators and decides whether contributions and income levels need to be adjusted to keep pace with the cost of living. There have been many changes to retirement plans for 2015 that you should be aware of so that you can take full advantage of the new limits to maximize your tax efficiency.
COLA Increases and Social Security Benefits
COLA stands for “cost-of-living adjustment.” The IRS tax law limits how much you can contribute to your workplace retirement plan and your IRA each year, and you cannot exceed these limits. However, the limits set by the IRS must adjust annually based on cost-of-living increases. Limits vary based on the particular retirement plan.
COLA also affects Social Security and Supplemental Security Income, or SSI, benefits. If you are collecting benefits, the COLA provides for an increase in the amount your benefit to allow you the ability to maintain the same standard as the price of goods increase year to year.
The latest COLA for Social Security benefits was 1.7 percent, and benefits will increase by 1.7 percent, payable in January 2015. COLA is calculated on increases in the consumer price index.
Defined Contribution Plans and Profit Sharing Plans
A big highlight of the new limits affects employees who want to maximize their retirement contribute to a 401(k), 403(b) and most 457 plans. The contribution limit has been increased by $500, from $17,500 to $18,000 a year.
Additionally, the amount of an employee’s compensation that can be considered to calculate contributions to profit sharing plans, more commonly referred to as SEP and Solo(k)s, has adjusted upward for 2015 to $265,000. This is $5,000 increase from $260,000 for 2014.
Catch-up contributions went up as well for employees who participate in a 401(k), 403(b) and most 457 plans. For 2015, employees who are 50 and older can contribute $6,000, up from $5,500.
Individual Retirement Accounts (IRAs)
The annual contribution limit for both traditional and Roth IRAs remains unchanged for 2015 from what it was for 2014: $5,500. The catch-up contribution for people 50 and older also remains unchanged at $1,000.
What has changed with traditional and Roth IRAs are income limits. Here are the changes for a traditional IRA:
- If you are covered by a workplace retirement plan, your Adjusted Growth Income, or AGI, must be $61,000 or less to get the full deduction. Your AGI can be as high as $71,000 to get a phase-out deduction. This figure is up $1,000 from last year.
- Married people who file jointly and where the spouse who makes the contribution has a workplace retirement plan have an AGI limit of $98,000 for the full benefit and as high as $118,000 for a phase-out deduction. This represents a $2,000 increase from last year.
- Married people who file jointly and where the spouse who makes the contribution is not covered by a work retirement plan, the spouse receives the full benefit if their joint income is $183,000 or less and can get a phase-out deduction for an income up to $193,000, also up $2,000 from last year.
Roth IRAs have increased income levels as well. Here are the changes for a Roth IRA:
- If you are single and your AGI is $116,000 or less, you can make a full contribution. You can contribute with a phase-out contribution for an income as high as $131,000. This represents a $2,000 increase from last year.
- If you are married and plan to file jointly, your AGI limit is $183,000 for a full contribution up to $193,000 for a phase-out contribution, which is also up $2,000 from 2014.
What is the right contribution amount for you?
That is usually the first question followed by,
Will I have enough saved for retirement?
Should I contribute to a ROTH or Traditional?
What are the tax benefits I am getting for my contributions?
When should I do a ROTH Conversation?
Unfortunately there is no one size fits all answer to these questions. You should know that retirement planning does not need to be an overwhelming experience.
We are available to help you make a good decision when considering how to plan for your retirement. Send us a note and let us know that this is important to you. We will be in touch to find a time to review together.
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