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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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25 Comments
ronald j. ostrow
January 25, 2014 at 1:27 pm

Key Corp. was the 20th most active stock traded on the NYSE Friday.any idea of why. I know banks took a big hit Thursday and Friday. But why is KeyCorp leading the pack?

Barbara Whelehan
January 21, 2014 at 6:38 pm

Hi Barbara,

The answer to your question is a bit complicated. I asked our Tax Adviser, Judy O'Connor, for help. She says the amount you can contribute to a retirement plan depends on if your company is going to pay you a salary (if your company is an S Corp or regular corp, for example) or if you are self-employed (filing as a sole proprietor on Schedule C). Also, you need to have income aside from the severance to invest in a retirement plan. If your company pays you a salary of $116,000, you can do a 401(k) deferral of $23,000, and your company can kick in another 25 percent of your salary to bring it up to $52,000, she says. If you're self employed, a different computation is involved. I asked Judy to address your question in one of her future Tax Talk columns, so tune in periodically to get a more comprehensive answer from her. Thanks for writing, and good luck!

Barbara
January 17, 2014 at 9:29 pm

In 2013 I was an company employee and made 401k contributions. I am over 55. I accepted an excellent severance package when my division was downsized. I received the generous severance payment, minus taxes, early in 2014 but was not allowed to make 2014 contributions to the company 401k. I was told that it was because I was not an employee anymore. Can I call the severance amount a consulting fee, I have done some consulting for them, and deposit a chunk of the package into my own company's 401k plan to help shelter it? Otherwise the money is in a twilight zone of no shelter. What do you recommend that I read or do about this?

Barbara Whelehan
January 06, 2014 at 5:14 pm

Hi Robert --

Congress has not yet extended the charitable IRA rollover for 2014. You may recall that it had expired in each of the last three years, only to be renewed by Congress. We don't know if Congress will do so again, but it's pretty widely expected that they will. Thanks for writing.

Robert
January 06, 2014 at 4:48 pm

My question is about the max that an individual can withdraw from their IRA and donate to a non profit. As i understood for 2013 one could donate up to $100,000 for the year. Any amount above that had to be reported as income with that amount able to be itemized on tax return. I was informed that this would end after 2013.

Has congress extended this for 2014 or is this something they will look at later this year?

Barbara Whelehan
January 03, 2014 at 3:03 pm

Hi Fred --

I can answer general questions about retirement plan rules, but I'm not qualified to give individual tax advice. From the information that you provided, it seems like there's no reason why you can't contribute to a Roth IRA. As for whether it's worth converting traditional IRA assets to a Roth, that depends on a lot of factors such as your age, your tax bracket now versus what you expect it will be in retirement, and whether you use outside funds to pay tax on the conversion. Generally speaking, it's a good idea to have retirement funds in various types of retirement accounts for tax diversification purposes. Bankrate's story on "Tax-savvy retirement plan distributions" explains why. Good luck!

Fred
January 03, 2014 at 2:31 pm

I retired from an auto company in 2007. I went to work for another auto company direct after that. I left that company in April of this year. I was participating in my company's Employee Managed Retirement plan till I resigned. I also took a cash buy out of my original pension plan in mid April of this year. My wife currently works and participates in a employee matching 401K plan. For 2013 we will file jointly and our combined AGI will be under $181,000. Does that mean we can contribute to a Roth IRA? If so, would it be worth pulling out money from our IRA and putting it in a Roth IRA?

Barbara Whelehan
January 02, 2014 at 5:50 pm

For 2014, total annual contributions allowed in a participant's account is $52,000, up from $51,000 in 2013. You can add catch-up contributions to that amount. So for those who are 50 or better, the max amount is $57,500, according to the IRS. Annual contributions can consist of elective deferrals by employees, employer matching and discretionary contributions and forfeitures. And you're correct in that you can make a nondeductible contribution to a traditional IRA and then convert it to a Roth, but it can get tricky if you have a large amount of money in a traditional IRA rollover, as is explained in Bankrate's story, "The drawback to one type of Roth conversion."

Thanks for writing.

uffdatx
January 02, 2014 at 5:11 pm

You did leave out one maximum. The maximum contribution to an individual's retirement plan including an employers matching contribution. I believe that one went up $1,000 to $52,000 per year. Do you know if the maximum also includes make-up contributions for those of us 50 and over? Or is our maximum $57,500?

Also, I believe if you make too much to contribute directly to a Roth IRA, you can still contribute to a Traditional IRA, after tax, and do a Roth conversion the next day. This basically goes around the income limits for contributing to a Roth IRA. Is this still the case?

Barbara Whelehan
January 02, 2014 at 10:37 am

Hello, Danny and Thomas Brown:

Let me tackle your questions individually, below.

Danny -- I'm not sure how to answer your question. Double dipping is usually associated with public pension plans. The idea is that taxpayers shouldn't have to pay for the retirement of someone who is still drawing a paycheck from the same agency they "retired" from. Some get around the rules by retiring for a period of time and then going back to work. The practice is frowned upon for obvious reasons. But you say you work for a "company" rather than a government agency, which suggests you work in the private sector. If you are talking about drawing Social Security while working, rules are in place that prevent you from getting the full Social Security benefit if your income exceeds certain levels. Bankrate's article, "Don't fall into these Social Security traps," offers more details. If you are asking about taking distributions from a private pension, Kay Bell, Bankrate's tax editor, says you will have to pay a 10 percent penalty for taking a distribution before age 59 1/2 unless you take distributions "as part of a series of substantially equal periodic payments from a qualified plan that begins after your separation from service. But that means leaving the job." At age 53, certainly you have skills that are transferable to another job! Or you might try something completely different -- something you've always wanted to do, but resisted for reasons that may not be so important anymore.

Thomas -- I have good news for you. You can contribute to a Roth IRA regardless of your age. However, you must do so with earned income, not with pension money or Social Security checks. As long as you earn at least the amount you contribute, you can put it in a Roth IRA.

Thanks for your interest. Happy New Year!