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IRS Pension Update: New Limits for 2015

alderman_color_1By Jason Alderman

Recent surveys indicate the majority of the American public is nowhere near a comfortable retirement. One of the more attention-grabbing personal finance headlines this year came from Bankrate.com, which reported in August that one-third of Americans have less than $1,000 saved for retirement. It pointed out that 14 percent of the population aged 65 or older have no retirement savings; the case is the same for 26 percent of those aged 50-64, 33 percent aged 30-49 and 69 percent aged 18-29.

The Employee Benefit Research Institute’s annual Retirement Confidence Survey noted in March that roughly 70 percent of their respondents were “not very confident” that they would have enough money to live comfortably throughout their retirement years.

There is one thing most experts agree upon – finding a safe retirement savings target depends a great deal on when you actually start saving, whether it’s through employer-based or self-employment retirement plans, personal tax-advantaged savings plans or individual investment.

Is it ever too late to start? The answer is no, as long as you’re prepared to be thrifty, well advised about your options, and willing to extend your working years if necessary. Building a successful, comfortable retirement depends on a variety of individual factors, including where you live, how long you plan to work, your health, and your other investments and assets. The longer you wait, the more you might have to adjust behavior and expectations.

The IRS recently announced an update for your options, including cost-of-living adjustments that will give many taxpayers the advantage of putting more away during 2015. Here’s a summary:

  • Regular contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan. Increased from $17,500 (for tax year 2014) to $18,000 (for tax year 2015). The catch-up contribution limit for employees aged 50 in these plans is increased from $5,500 to $6,000. Contribution deadline: Dec. 31.
  • Annual contribution limits, Individual Retirement Accounts (IRA). For both traditional and Roth IRAs, the annual contribution limit is not subject to a cost-of-living adjustment and remains at $5,500. The over-50 catch-up contribution amount is $1,000. There are particular restrictions based on income levels and workplace retirement plan coverage, among other issues. Contribution deadline: April 15.
  • Higher 2015 income phase-out levels for traditional IRA contributions. For singles covered by a workplace retirement plan, the 2015 cutoff is a modified adjusted gross income (AGI) between $61,000 and $71,000, up from 2014’s AGI range of $60,000 and $70,000. For married couples filing jointly with the spouse making the IRA contribution also covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains $0 to $10,000.
  • Higher 2015 income phase-out levels for Roth IRA contributions. For married couples filing jointly, the 2015 level is $183,000 to $193,000, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range remains $0 to $10,000.

What can you do if you’re in your 50s without much preparation for retirement?

  • Get qualified advice. Tax and financial planning is a must for individuals and couples playing catch-up. Finding qualified financial and tax advisors may start with trusted friends and family members, but organizations such as the Certified Financial Planner Board of Standards, the Association for Financial Counseling Planning and Education or your state CPA society can suggest qualified professionals in your area.
  • Budget and downsize. Most experts believe late starters (50 and over) need to put away at least 10 percent of gross income to start making headway. All budgets start by tracking every dollar you spend daily – from essentials like housing, food, and transportation to frills like carryout and lattes. You might also consider relocating to smaller, more affordable space.
  • Pay off non-tax-deductible debt. Even if it means saving only a miniscule amount for retirement right now, extinguish as much of your non-tax-deductible debt as possible, starting with credit cards. Getting rid of the interest payments alone will free up substantial dollars that can be put toward retirement.
  • Take advantage of “catch-up” contribution limits. Retirement savers over the age of 50 have the option to put more away not only in traditional and Roth IRAs but also 401(k) plans – not including SIMPLE 401(k)s, 403(b) plans, SARSEP and 457(b) plans (see Annual contribution limits, IRAs above).
  • Keep working…strategically. If you’re lucky, you love your work or are in a position to change careers to one with better retirement savings options. If so, consult an expert on ways to keep earning and investing effectively.
  • Delay Social Security payments as late as possible. You must know that Social Security income is a relatively small fraction of what you’ll need to retire comfortably, even if you extend your retirement as long as you can. Check the Social Security Administration’s Delayed Retirement Benefits page for a discussion of how and when to take benefits.

Bottom line: The government’s cost-of-living adjustments will allow you to save more for retirement in 2015, but don’t wait until then to evaluate your goals to set – or reset – your retirement planning going forward.

Jason Alderman directs Visa’s financial education programs. To Follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney

This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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