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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
Thomas Brown
January 02, 2014 at 12:47 am

I retired last year 1 Jan 13. I receive military retirement and SS. Can I still contribute to a Roth IRA. The definition for military pay is reduced pay for reduced survives. I would like to continue investing. Thank you.

Danny
December 24, 2013 at 8:03 am

Barbara
Can you tell me anything about what the IRS calls double dipping? and is there any chance of them doing away with it? I'm closing in on 30 years with the company I work for. And IRS says I can't Draw my retirement and keep working for the same company untill i turn 62. I'm only 53 to young to retire and stay home. And to old to start over with a new job.

Barbara Whelehan
December 04, 2013 at 9:16 am

Hello, Jerome and Michael:

Thanks for your interest. Let me tackle Jerome's question first. I asked Kay Bell, our Tax Guide editor, what she thought about your question since I have no idea, and her reply is below.

According to Kay: "It's a popular option and charitable groups made a special trip to DC last month to lobby for protection of charity-related tax breaks. Still, there's been no indication of what Congress might do. Everyone is playing their cards close to the vest, especially with the budget negotiations going on now and another possible government shutdown in January. It's possible that this provision, and many of the other tax extenders, could be tacked on to one of those funding measures. It also could be made retroactive if they aren't reauthorized until 2014. Bottom line: we don't know yet."

Michael: Everyone's tax situation is different, but in general, when your taxable income, tax-free income and half of your Social Security benefit exceed $25,000 ($32,000 for married couples filing jointly), your Social Security income may be taxable. More information is in Bankrate's story called "Don't fall into these Social Security traps."

Michael
December 03, 2013 at 12:06 pm

When I draw my Social Security in 21 months it will be around $33,000. I will start to draw my pension of $21,500 too. How much of this combined $51,500 will be subject to Federal Tax??

Jerome Cunningham
November 29, 2013 at 11:56 am

Hello Barbara: Any thoughts as to the likelihood of having a renewal of the ability to IRA MRD to charity again in 2014 and avoid having to pay tax on the distribution?

Thanks.

Barbara Whelehan
November 12, 2013 at 3:04 pm

Hi Ronald -- I don't have an answer for you, but your question prompts me to investigate the matter, and it may result in an upcoming story on Bankrate.

Hi Bryan -- I do have an answer for you. The annual defined contribution limit was bumped up by $1,000 to $52,000, and that does not include age-based catch-up contributions.

Thanks for writing.

Bryan
November 12, 2013 at 1:04 pm

Did the maximum contributed to an employer retirement plan, including employer matching stay at $51,000? Does the maximum include the "catchup" contributions for those 50 and over?

Ronald
November 04, 2013 at 7:55 pm

Barbara,our pension interest rate tiers 1 2 1nd 3 were just raised a full percentage point, this reduces the lump sum available in our defined pension plan alot. They say the rates are set by the IRS ? Is their a 25 year average in effect now on the rates they choose. What ranges can we expect in the future. Thanks Ron

Barbara Whelehan
November 04, 2013 at 1:18 pm

Hi Eric -- Yes, you can. But if you earn more than a certain amount, you may not be able to deduct the traditional IRA, though you can always make nondeductible contributions or possibly contribute to a Roth IRA, depending on your income. Try not to mix up your nondeductible contributions in a traditional IRA for which you made deductible contributions, since you won't have to pay income taxes on nondeductible contributions. It's taxes, so it's got to be complicated.

Eric
November 04, 2013 at 12:11 pm

When over 50, can I max out both a workplace 403b ($23,000) and a non-work traditional IRA ($6,500)?

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