How to Max Out Your Retirement Accounts in 2015
Contributing to retirement accounts allows you to build wealth, capture valuable employer contributions and qualify for tax breaks, all at the same time. But few savers are able to capture all of the advantages that 401(k)s and individual retirement accounts offer. Here's how to make the most of your retirement accounts in 2015.
Max out your 401(k). You can contribute up to $18,000 to a 401(k) plan in 2015, $500 more than in 2014. To be on track to max out your 401(k), you will need to contribute $1,500 per month or $750 per paycheck if you are paid twice per month. If you were already maxing out your 401(k) plan in 2014, you can reset your monthly contributions about $42 higher to take advantage of the higher contribution limit. "Adjust your deferral slightly upward to make sure you don't miss out on maximizing your 401(k)," says Michael Hollars, a certified financial planner for Client First Finance in Sunnyvale, California. A worker in the 25 percent tax bracket who contributes the maximum possible amount to a 401(k) in 2015 will save $4,500 on his 2015 tax bill. Taxes won't be due on that money until it is withdrawn from the account.
Remember to make catch-up contributions. Workers age 50 and older can contribute $24,000 to a 401(k) account in 2015, $6,000 more than younger workers. Older workers need to save $2,000 per month or $1,000 per bimonthly paycheck to take maximum advantage of their 401(k) account. Older workers who manage to max out their 401(k) will reduce their income tax bill by $6,000.
Get your employer match. An employer match or other types of company contributions will help you grow your retirement account balance even faster. The most common employer match is 50 cents for every dollar saved up to 6 percent of pay, according to Vanguard data. For a worker earning $60,000 per year, this employer match could be worth as much as $1,800.
Max out your IRA. Workers can contribute up to $5,500 to an IRA in 2015 or $6,500 if they are age 50 and older. Saving this amount requires a contribution of $458 per month or $542 for people age 50 and older. However, savers who have a workplace retirement plan and a modified adjusted gross income between $61,000 and $71,000 for individuals and $98,000 to $118,000 for couples in 2015 are ineligible for part or all of the tax deduction for making a traditional IRA contribution. Spouses without a workplace retirement plan who are married to someone who has one won't get the full tax deduction for an IRA contribution if the couple's income tops $183,000 or any deduction if it's over $193,000 in 2015.
Consider a Roth account. Contributions to a Roth account don't get you a tax break in the year you make the contribution, but withdrawals in retirement, including the earnings, are tax-free. Roth IRA eligibility phases out for individuals earning between $116,000 and $131,000 and couples bringing in $183,000 to $193,000. However, workers earning more than this are still eligible to convert traditional IRA assets to a Roth. "Although you could be above the income limits, you can get around it by doing a backdoor Roth," says Kevin Brosious, a certified financial planner and president of Wealth Management Inc. in Allentown, Pennsylvania. "You contribute to a nondeductible IRA, and then you can convert that nondeductible IRA to a Roth IRA."
Get the saver's credit. In addition to a tax deduction on your 401(k) and IRA contributions, some workers can claim the saver's credit. Workers with an adjusted gross income under $30,500 for singles, $45,750 for heads of household and $61,000 for couples in 2015 can claim the saver's credit, which can be worth as much as $1,000 for individuals and $2,000 for couples.
Minimize fees. The fees you pay on your investments or to maintain the account reduce your retirement account balance. "Try to look for some low-cost investments within your 401(k). Index funds typically have the lowest fees," says Colleen Weber, a certified financial planner in Chanhassen, Minnesota. "The employee can keep more of the returns for themselves when they have the lower fees."
Avoid penalties. There are penalties if you withdraw money from your retirement accounts too early or too late. You will typically trigger a 10 percent early withdrawal penalty if you take distributions from traditional retirement accounts before age 59½. There's also a 50 percent penalty if you fail to take annual distributions from your traditional retirement accounts after age 70½. Roth IRAs offer more flexibility because withdrawals aren't required in retirement.
Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at email@example.com.