IRA and 401(k) Changes Coming in 2015: Make the Most of Them
401(k) Contribution Limit for 2015
- You are younger than 50:The maximum you can contribute from your paycheck is $18,000, up from $17,500.
- You are 50 years old or older: The IRS lets you contribute more since you are closer to retirement. The maximum catch-up contribution has increased from $5,500 to $6,000. This means you could contribute up to $24,000 in your 401(k) for 2015 (base amount of $18,000 plus the $6,000 catch-up).
- You are younger than 50: Strangely, the IRS kept this amount at $5,500.
- You are 50 years old or older: Again, the IRS kept the catch-up contribution at $1,000. So if you are 50 or older, the maximum you can contribute to your IRA for 2015 is the base $5,500 with the $1,000 catch-up amount for a total of $6,500.
- You file taxes as single or head of household: If you have an adjusted gross income of less than $116,000, you can contribute the maximum; however, if your AGI is more than $131,000, you cannot contribute anything. If your AGI is between $116,000 and $131,000, you can contribute a reduced amount.
- You file taxes as married filing jointly: If you and your spouse have an AGI less than $183,000, you can contribute the maximum; however, if your AGI is more than $193,000 you cannot contribute anything. If your AGI is between $183,000 and $193,000, you can contribute a reduced amount.
Another option for savers without an employer-sponsored retirement savings plan is the new myRA. You may have heard President Obama talk about this savings program back in his January 2014 State of the Union address. There hasn't been much talk or press about the program since then, and after digging into the details, I can see why.
Here are the basics. The myRA is being described as a "starter retirement savings account." It's basically a Roth IRA for lower- to middle-income earners. Through payroll deductions (yes, your employer has to agree to provide this), you can contribute money after tax -- as little as $5 at a time -- and it will grow tax free. The advantages are that there are no fees, and you can't lose your principal. Yes, you read that correctly: Unlike many other investments that may experience wild swings in value, the account balance in a myRA will never go down, because contributions are invested in Treasury securities backed by the full faith and credit of the United States. So think of a myRA as more of a savings account and less of an investment account.
Individuals earning up to $129,000 and couples earning up to $191,000 are eligible to contribute up to a maximum of $5,500 a year ($6,500 a year if you are 50 or older). But once your myRA account balance reaches $15,000, you'll be required to move it to a Roth IRA.
I don't get it. If you want to save for retirement, I think a traditional IRA or Roth IRA, which gives you access to higher growth investments, makes a lot more sense in the long run. Plus, there are many low-cost options for you to invest in mutual funds with no transaction fees through the major discount brokerage firms, and you can do that without any help from your employer.
What Question Really Matters?
The great majority of 401(k) and IRA participants do not contribute the maximum each year, so increasing the limits won't affect most savers. The question for many is not, "What is the most I can save?" but "How can I save more?"
The best answer is to simply start, but to start slowly. Tell your human resources department you want to increase your contribution percentage by 2 percent. Set a calendar reminder in three months to have it increased by another 2 percent. Keep doing this every three months until you start to feel the pinch in your household budget. I've found that most people can save between 4 percent and 10 percent more each year without experiencing any noticeable difference in their lifestyles.
If you bump up against the maximum contribution limits, well done. But even if you don't get close to those limits, every extra amount you can save inside a retirement plan such as a 401(k) or an IRA or outside a retirement plan is going to help.
Robert Pagliarini is a best-selling author and Mission Viejo, California, financial planner who focuses on sudden wealth recipients. Connect with him on Twitter at @rpagliarini.