Most CERTIFIED FINANCIAL PLANNERTM professionals encourage clients to start saving for retirement early in life . . . and for good reason. Consider that $25 in savings per month will grow to over $10,000 in 20 years and as high as $30,000 in 30 years if invested properly and earning a 5% compounded return. There are clearly great benefits for your retirement savings if the advice to start early is followed diligently. The complexities, however, of how much and which savings plan to use are often confusing and can cause paralysis, which may result in little or no change to your retirement savings plan. Here is some information to help you decide how much and where to save for your retirement, including limits for 2014 set by the U.S. Internal Revenue Service.
A truly great, if not the best, savings vehicle for retirement is an employer retirement savings account. You can set up regular monthly contributions so you don’t ever see the money allocated to savings in your take home pay. Your contributions go directly into your account before being taxed, and the money grows tax-deferred until you are ready to withdraw it. You have options depending on your particular situation, i.e. whether you are working for an employer or self-employed. There are many, including 401(k), 403(b), 457, and SEP-IRA (Simplified Employee Pension IRA).
Contributing to these accounts not only sets aside savings for retirement, but helps to reduce taxes. However, the IRS limits the amount you can contribute each year and can change those limits annually, usually to keep pace with inflation. Learning about the 2014 contribution limits is important so you can save more this year and give your retirement plan a boost.
How much can one contribute to an employer-sponsored retirement account . . . 401(k), 403(b) and most 457 plans in 2014?
- Employees have an elective deferral (contribution) limit of $17,500.
- Individuals age 50 or older are allowed to make an additional “catch-up” contribution of $5,500.
How much can one contribute to a traditional IRA and Roth IRA in 2014?
- The contribution limit is $5,500.
- Individuals age 50 or older are allowed to make an additional “catch-up” contribution of $1,000.
The IRS has established a phase out, a gradual reduction of one’s eligibility to contribute (ROTH IRA) or have the contribution be deductible for tax purposes (Traditional IRA), based on one’s adjusted gross income (AGI), starting at these income levels:
Traditional IRA Phase-Out for Contribution Deductibility
(assumes you are covered by a retirement plan at work)
Married – Phase-out starts at $96K; if AGI > $116K, not deductible.
Single or Head of Household – Phase-out starts at $60K; if AGI > $70K, not deductible.
Roth IRA Phase-Out Eligibility Range
Married – Starts at $181K; if AGI > $191K, not eligible.
Single or Head of Household – Starts at $114K; if AGI > $129K, not eligible.
How much can one contribute to a SIMPLE IRA (Savings Incentive Match Plan) for small businesses in 2014?
- The contribution limit is $12,000.
- Individuals age 50 or older are allowed to make an additional “catch-up” contribution of $2,500.
How much can one contribute to a SEP-IRA for self-employed individuals in 2014?
The contributions you make to either yours or your employee’s SEP-IRA each year cannot exceed the lesser of:
- 25% of compensation or
- $52,000 (subject to annual cost-of-living adjustments for later years).
Note: The limits to contributions you make for your employees apply to all defined contribution plans, including SEPs. If you are self-employed, there is a special calculation to determine contribution limits.
Tips for Savings Success
- For your employer retirement plan at work, contribute the minimum necessary to get a full employer match. If there is no employer match at your firm, make an annual goal of contributing 10% of your salary to your retirement savings.
- Take advantage of automatic monthly deferrals with your employer, bank, or payroll vendor.
- Review your investment accounts and update or rebalance at least once per year to ensure you remain diversified within your risk tolerances while meeting your return needs.
- If your employer retirement plan has limited investment options or doesn’t offer enough flexibility for your needs, consider either a self-directed retirement account (if offered through your plan) or an “In-Service Withdrawal” which allows you to move your funds into a Rollover IRA. Note: Before taking this big step, be sure to educate yourself on the pros and cons of doing an IRA rollover from an employer retirement plan.
- Talk with your CERTIFIED FINANCIAL PLANNERTM professional or investment advisor to ensure you are contributing an amount sufficient to reach your retirement or other financial goals.
Summary Tips (short version)
- Contribute at least 10% of your salary to your employer sponsored retirement plan.
- Set up monthly automatic contributions to your savings accounts.
- Consider an IRA or ROTH IRA contribution if you have plans to max out your employer plan contributions for the year.
- Review, update, and evaluate the efficiency of your investment accounts annually, and
Discover the positive effect on your retirement plan of a focused savings plan!