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Contributing to a retirement plan is one of the best tax shelters available to you during your working years.? Recently, the IRS announced that most of the retirement savings limits will NOT increase for 2014.
RETIREMENT PLAN LIMITS FOR 2014:
Maximum Contribution for 2014
?401(k) or 403(b)?Deferrals
?$17,500 in 2014
?Roth and Traditional IRAs
?$5,500 per person
|?Self-employed Retirement ? Plans
SEP or Keogh – $52,000/yr
Solo 401(k) – $52,000/yr
SIMPLE – $24,000/yr
?$14,000 per donor (up to $70,000 in one year)
If you?ll be 50 or older by December 31, 2014, you can contribute an extra $5,500 into your 401(k), Solo 401(k), or 403(b) plan, an extra $2,500 into your SIMPLE, and an extra $1,000 into your IRA.
Make sure you make applicable elections in connection with?your employer’s Flexible Spending Account!
Determine whether to convert your IRA to a Roth IRA.? Ask your accountant or financial planner for help if you need it!
On Halloween night, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations. Unfortunately, the bulk of the retirement savings limits will not increase from 2013.
According to the October 31st announcement made by the IRS on Pension Plan Limitations for 2014, “Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.”
No Increases for 2014
Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. Like 2013, you can contribute up to $17,500 into a 401(k) or 403(b) plan through salary deferrals in 2014.
Anyone 50 or older by December 31, 2014 can contribute an extra $5,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $23,000. That is the same as what was allowed during 2013.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE’s work just like 401(k) plans, which means it’s up to you to fund the bulk of this retirement savings account through salary deferrals. For 2014, the maximum contribution into your SIMPLE remains at $12,000. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2014, for a total annual contribution of $14,500, unchanged from 2013.
And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2014 increases by $1,000 to $52,000.
Increase to IRAs
Don’t forget about IRA’s. Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $5,500 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $6,500. You have until April 15, 2015 to contribute to your IRAs for 2014.
There is a bit of good news for people looking to contribute to a Roth IRA in 2014. While the amount you can earn and still contribute to a Roth has not increased for single individuals, this threshold did increase by $2,000 for single individuals and $3,000 for joint filers as follows:
|Single ? Individuals||Married ? Couples|
|Phase-out ? begins||$114,000||$181,000|
|Phase-out ? ends||$129,000||$191,000|
If your income is too high for a Roth, don’t forget that the rules changed a few years ago, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.
And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $181,000 – $191,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2014 Budget
Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2013 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2014.
2014 Maximum Retirement Account Contributions:
|Retirement Savings Option||Under the age
|50 or older by December 31st|
|401(k) or 403(b)||$17,500
Let?s start by discussing some of the benefits of setting up and maintaining a Retirement Plan for your practice.? The first benefit is that contributions you make into the retirement plan are generally tax deductible, and then those contributions grow tax deferred.? Remember, contributing to a retirement plan is one of the best tax shelters available to people during their working years.
Here are a few questions I get all the time:
- Why bother contributing to a retirement plan at all?
- And why contribute now, especially since the stock?market, until recently, hasn?t performed all that well during the past decade or so?
When you contribute to a retirement plan, the taxes you save provide you with an Immediate Return on your Investment.? Let?s assume you?re in the 28% federal tax rate, and you live in a state with a 5% rate.? So each additional dollar of income you earn is taxed at 33%.
In this scenario, you would earn an instant 49.25% return on your investment by contributing to a retirement plan. That?s because it only costs you $670 in after-tax dollars for every $1,000 that is now invested. You?ve already earned a whopping $330 on the $670 you invested.
Yes, you will owe income taxes on the money withdrawn from these accounts down the road, but you get to invest the government?s money over all those years that the money remains within your retirement accounts. And, you get to keep the investment earnings on the government?s money.? Trust me, investing the tax savings over time really adds up.? The compounded growth on the tax savings can easily add up to tens of thousands of dollars or more.
For example, $100k invested and earning an average of ?8% per year over 25 years will grow to be worth $685k within a tax-deferred account.? What happens if you pay taxes each year at a 33% rate?? Since your compounded return falls from 8% to 5.35%, this $100k investment will grow to just $370k over 25 years, assuming all the income and growth within the account is fully taxed each year. That?s how powerful tax-deferred compounding can be.
There are additional benefits of a retirement plan.? For starters, money in most retirement plans is protected from your creditors. That?s great news for anyone in a profession like healthcare where getting sued is not completely out of the question. Please check with a lawyer to find out which types of retirement accounts are protected based on the rules for your state.
Plus, contributing to a retirement plan is one of the best ways to build a nest-egg to fund your post-working years.? Unless you work for a government employer or some other business that provides a lucrative pension, it?s up to you to make sure you have enough money set aside to fully fund a comfortable retirement.? And the earlier you start building our nest egg, the better chance you give yourself to reach your retirement savings goals.
Looking for additional benefits of maintaining a retirement plan for your practice?? Offering a retirement plan might be a way to help you attract and retain staff, and is also a great way to reward staff for loyalty and longevity at your practice.? Most practice owners would agree that having an engaged staff is a key ingredient to having a successful practice.
We’re pleased to provide you with a recorded PowerPoint presentation narrated by yours truly (Boston accent and all) on Retirement Plan Basics for Practice Owners.? This presentation explains the benefits and costs of the most popular retirement plan options available to self-employed Doctors including SEP IRA, SIMPLE IRAs, Keoghs, Profit Sharing Plans, Safe Harbor 401ks, and Cash Balance Defined Benefit Plans