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New IRS Tax Rules to Know
There are new changes to retirement accounts for 2015 that have been implemented by the IRS. One or more might impact your return next year, they are:
- Limit for defined contribution plans (e.g. 401k)
- The MyRA
- Limit on IRA rollovers
- AGI phase-out ranges
This week we take a closer look at the first two, new limits for defined contribution plans such as 401(s) and the MyRA, the newest retirement plan.
Defined Contribution Plans — For the 2013 and 2014 tax years, individuals were able to contribute up to $17,500 as an elective salary deferral to a defined contribution plan. Also, an individual could contribute an additional catch-up contribution of $5,500 starting in the year they turn 50 years of age. The limits for these type of plans, the 401(k) is the most well known, have been raised. The maximum contributions to private sector 401(k) plans, the federal government’s Thrift Savings Plan (TSP) and other comparable programs have been raised to $18,000 for 2015. For people over 50 years old, the catch-up contribution threshold has been increased from $5,500 to $6,000.
Of course a key feature of defined contribution plans such as a 401(k) is that the contributions are deducted from the individual’s paycheck before taxation and therefore, taxes are deferred until withdrawn after age 59½.
MyRA — Early last year, President Obama introduced the MyRA – short for My Retirement Account. The program’s goal is to encourage Americans to build savings that can supplement Social Security benefits. Individuals are allowed to open a MyRA with as little as $25, and to contribute as little as $5 in regular payroll deductions. Contribution limits are the same as for IRAs – currently $5,500, plus an additional $1,000 for those 50 years of age and older.
What are the key outlines of the plan in addition to the $25 required to open an account and the $5 minimum requirement for payroll deductions? The MyRA is available only to those who don’t have a retirement plan through their employer, there are no matching contributions, it is only available to those whose household income is less than $191,000 each year and once the account balance hits $15,000 or after 30 years (or earlier if desired), it must be rolled into a private Roth IRA.
Essentially, the MyRA is a type of Roth IRA. Like Roth IRAs, contributions will be made on an after-tax basis, meaning account holders will not get to adjust – lower their tax liability – for the tax year the contributions are made. However, the MyRa account will grow tax free. For more information on MyRA, visit the Treasury Department MyRA page.
Next week, look for details on the new limit on IRA rollovers and the new Adjusted Gross Income (AGI) phase-out ranges.
Mr. James C. Molet holds a MBA from Wayland Baptist University. He blogs on financial topics at retirement savvy.net and author of RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit. Mr. Molet retired from the U.S. Army after 21 years in 2005.