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New IRS rules for retirement plans

By Barbara Whelehan · Bankrate.com
Friday, November 1, 2013
Posted: 3 pm ET

The IRS released its retirement plan limitations for 2014. Don't get too excited; the new rules don't change retirement planning all that much.

The contribution limits for workplace retirement plans, such as 401(k), 403(b) and 457 plans, remain unchanged at $17,500. Catch-up contribution limits also haven't changed, at $5,500 for those 50 and older, for a total possible contribution of $23,000 -- same as in 2013.

The amount you can contribute to Individual Retirement Accounts, or IRAs, also remains static, at $5,500, plus $1,000 for those 50 and up.

It's not as if there will be a public outcry about the inability to contribute more. Few people max out their retirement plans. In fact, a new survey by Mercer finds that most people mistakenly believe the contribution cap is around $8,532, and they contribute less than that.

"The overarching message is that this is a pretty surprising and shocking perception gap, and that sponsors and the vendor community need to do a much better education job," says Bruce Lee, a spokesman for Mercer, which provides consulting services for human resource departments worldwide.

Another potential problem, says Lee: "People might get their 'maxes' confused. In other words, those that are maxing their contribution to hit the employer's match might think this is also the IRS max limit," he says.

Now you know the true maximum limit: $17,500 or $23,000 if you're 50-plus. Challenge yourself to contribute more to ensure a comfortable retirement.

IRS cost-of-living adjustments

Faithful readers of Bankrate know that contributions to workplace plans are taken off the top, meaning you generally pay no income taxes on them, though you will have to pay taxes at ordinary rates after you retire and begin taking distributions.

However, your ability to take a tax deduction for contributions to a traditional IRA depends on whether you invest in a workplace plan and how much you earn. Deductibility is phased out incrementally when your adjusted gross income, or AGI, exceeds a certain threshold. The so-called "income phase-out ranges" increased a bit in most cases.

Here are the new limits:

  • Deductions for IRAs made by single and head-of-household filers phase out for those who are covered by a workplace plan and have AGIs between $60,000 and $70,000, up from $59,000 to $69,000 in 2013. That means you get a full deduction if you earn up to $60,000, and a partial deduction if you earn up to $70,000.
  • If you're married filing jointly and you contribute to a workplace plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000 in 2013.
  • If you're married filing jointly and your spouse contributes to a workplace plan but you do not, the income phase-out range for deductibility of contributions is $181,000 to $191,000, up from $178,000 to $188,000 in 2013.
  • If you're married and filing separate returns, the phase-out range remains $0 to $10,000, the same level it's been for many years, and doesn't get a cost-of living adjustment.

If you contribute to a Roth IRA, you don't get a tax deduction upfront, but rather you pay income tax on the contribution. But then your IRA can grow unfettered and free of tax forever with no required minimum distributions and no tax due when you do take money out. However, if you already contribute to a workplace plan and your income exceeds certain levels, your contribution to a Roth IRA may be limited or prohibited.

Here's the nitty gritty:

  • Income phase-out ranges for married couples filing jointly who contribute to a Roth IRA are $181,000 to $191,000, up from $178,000 to $188,000 in 2013. That means if your adjusted gross income is less than $181,000, you can contribute the full amount allowed. Your Roth contribution amount must be reduced if your earnings fall within the phase-out range.
  • For married couples filing separately, the phase-out range remains $0 to $10,000, with no cost-of-living adjustment.
  • Single and head-of-household filers can earn up to $114,000 and contribute to a Roth IRA. The income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000 in 2013.

***

Follow me on Twitter: @BWhelehan.

Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

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24 Comments
Shakia Mallin
May 11, 2014 at 9:40 pm

Great website, I love it

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Barbara Whelehan
February 10, 2014 at 9:51 am

Hello T Corrigan --

Your Roth strategies sound good to me, but I'm not an expert on the technical aspects of conversion, so I can't judge whether they'll work. One problem with doing a conversion is that you have to aggregate all your IRA assets to determine your tax liability, as explained in Bankrate's story, "The drawback to one type of Roth conversion." As for what you're doing for your children -- yes, that's a wonderful way to get them on the right financial track. They will likely thank you long before you're gone. Thanks for writing.

T Corrigan
February 07, 2014 at 8:22 pm

One other strategy I have used relates to my minor children. Each summer they work at a summer job. At the end of the summer, I see what their earned income was, gift them the same amount and they invest that money into a Roth. They will thank me in 50 some odd years when I am long gone

They save their earned income in a taxable account and invest that as well.

T Corrigan
February 07, 2014 at 8:18 pm

How about for someone with too much income to contribute directly to a Roth - such a person can make a non deductible contribution to an IRA then immediately convert that balance into your Roth.

Or if you participate in a work based 401k that allows for non deductible contributions and in service distributions, such a person could periodically transfer the non deductible balances that have built up in the 401k to an IRA and then immediately convert to the Rogh. What do you think about these strategies?

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