Tax-saving opportunities continue for retirement planning due to the availability of Roth IRAs, changes that make regular IRAs more attractive, and other retirement savings incentives.
Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2014 is $5,500. For 2014, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,500 for these individuals.
Individuals who are active participants in an employer sponsored retirement plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2014, the AGI phase-out range for deductibility of IRA contributions is between $60,000 and $70,000 of modified AGI for single persons (including heads of households), and between $96,000 and $116,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.
In addition, an individual will not be considered an “active participant” in an employer plan simply because the individual’s spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $181,000 to $191,000 ($0 – $10,000 if married filing separately) for 2014. Above this range, no deduction is allowed.
Spousal IRA: If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,500 for 2014 plus age 50 catch-up contributions, or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).
Roth IRA: This type of IRA permits nondeductible contributions of up to $5,500 for 2014. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 591/2. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2014 for persons with an AGI above certain amounts: $181,000 to $191,000 for married filing jointly, and $114,000 to $129,000 for single taxpayers (including heads of households); and between $0 and $10,000 for married filing separately who lived with the spouse during the year.
Roth IRA Conversion Rule: Funds in a traditional IRA (including SEPs and SIMPLE IRAs), qualified retirement plan, Section 403(b) tax-sheltered annuity or Section 457(b) government plan may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.
If you already made a conversion earlier this year, you have the option of undoing the conversion. This is a useful strategy if the investments have gone down in value so that if you were to do the conversion now, your taxes would be lower.
In addition, for 2014, if your §401(k) plan, §403(b) plan, or governmental §457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from such account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual.
401(k) Contribution: The §401(k) elective deferral limit is $17,500 for 2014. If your §401(k) plan has been amended to allow for catch-up contributions for 2014 and you will be 50 years old by December 31, 2014, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $23,000 ($17,500 in regular contributions plus $5,500 in catch-up contributions).
SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $12,000 for 2014. If your SIMPLE plan has been amended to allow for catch-up contributions for 2014 and you will be 50 years old by December 31, 2014, you may contribute an additional $2,500.
Catch-Up Contributions for Other Plans: If you will be 50 years old by December 31, 2014, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.
Saver’s Credit: A nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. For 2014, only taxpayers filing joint returns with AGI of $60,000 or less, head of household returns with AGI of $45,000 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $30,000 or less, are eligible for the credit. The amount of the credit is equal to the applicable percentage (10% to 50%, based on filing status and AGI) of qualified retirement savings contributions up to $2,000.
Required Minimum Distributions: For 2014, taxpayers must take their required minimum distribution from IRAs or defined contribution plans (§401(k) plans, §403(a) and §403(b) annuity plans, and §457(b) plans that are maintained by a governmental employer).
Maximize Retirement Savings: In many cases, employers will require you to set your 2015 retirement contribution levels before January 2015. If you did not elect the maximum 401(k) contribution for 2014, you can increase your amount for the remainder of 2014 to lower your AGI in order to take advantage of some of the tax breaks described above. In addition, maximizing your contribution is generally a good tax-saving move.