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.
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
|Phase-out ? ends
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)
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
As people switch jobs, change financial planners, or just move through life, it’s not uncommon to leave a trail of IRA accounts, 401k accounts, and 403b accounts. Why not take this opportunity to clean up these retirement accounts by consolidating them into one or two accounts?
Consolidating all of your retirement accounts into just a few accounts makes a lot of sense for many reasons, including:
? The fewer the number of accounts, the easier it is to manage your investment portfolio. There are recommended asset allocations based on your age, financial goals, and risk tolerance available on most financial websites. Plus, make sure to either periodically rebalance your investment portfolio on your own, or seek the assistance of a financial professional to help maintain the recommended asset allocation for your portfolio.
? You also generally have the opportunity to borrow half of the balance in your 401k or 403b account, up to $50k. This can include a Solo 401k as well. Please note, however, that you can only take out a loan from the account at your current employer based on that employer’s rules. For that reason, rolling old 401k and 403b money into your active 401k or 403 account could give you tax-free access to more of your retirement money in case of a financial hardship or to use as the down payment on a home. You can also usually roll IRAs into a 401k or 403b account too thanks to one of the Bush Tax Acts. (Please note that if you leave your current job and have not paid off the full amount borrowed, the remaining outstanding balance will be treated as a taxable distribution subject to federal income taxes, state income taxes, and depending on your age, a 10% early withdrawal penalty as well.)
Consolidating your accounts should actually be quite easy. Since one goal of every financial institution and investment advisor is to hold and/or manage as much in assets as possible, and they all love slow moving retirement assets, they should be extremely helpful as you complete the necessary paperwork to initiate and complete these rollovers.
Caveat converter. Anyone who contributes to a Traditional IRA each year, and then converts that IRA to a Roth IRA, probably does NOT want to roll their 401k and 403b accounts into an IRA. The way the formula works that determines how much of a Roth Conversion is taxable, the more money you have in IRAs, the higher the percentage of the conversion that is taxable. IRA assets include Traditional IRAs, Rollover IRAs, SEP IRAs, and SIMPLE IRAs.
Why not also take this opportunity to rebalance your entire investment portfolio as part of the spring clean up? Consider putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.
And while you’re at it, why not take this opportunity to review who is listed as a beneficiary on your retirement and insurance accounts too? No matter what your will says, the person who will receive money held in your retirement or insurance accounts when you die is the person listed as the beneficiary on that account on the day you die. If you got married, divorced, re-married, had kids, have kids getting married, reached the point where your kids are having kids, or other circumstances to your family life, did you update the beneficiaries listed on each retirement and insurance account to direct those assets to the proper person or charity upon your death?
By Michael Bohigian, EA
In part 1 of this series, we looked at the income side of the American Taxpayer Relief Act of 2012.? We’ll wrap up with Deductions and some tax-savings tips.
What?s Being Deducted From Your Deductions
Please, No Pease!
At first blush, you may be inclined to utter this lament when learning about the reduction of your itemized deductions due to the Pease Limitation. Fear not: This provision should leave many popular deductions intact for most taxpayers, including deductions for mortgage interest and charitable giving.
Here?s how it works: For a married couple, the Pease Limitation phases out itemized deductions by 3% of the amount that their adjusted gross income is over $300,000 [for individuals, the threshold is $250,000]. A married couple with an AGI of 800,000, for example, loses the right to deduct the first $15,000 of their itemized deductions. Since most of you already deduct more than this amount in state income taxes paid when you itemize, you effectively will still be able to deduct your mortgage interest and charitable giving. Take note that no matter how high your income, your itemized deductions cannot be phased out by more than 80%.
Personal Exemptions Phased Out
Similar to the phase out of itemized deductions, personal exemptions will be phased out at the rate of 2% for each $2,500 above $300,000 in income for married couples and $250,000 in income for individuals, causing high-income taxpayers to lose out on the tax break for themselves, their spouse, and their children and other dependents.
AMT Permanently ?Patched?
You no longer have to worry from year to year whether the government will patch the dreaded AMT. The Act permanently indexes the AMT to inflation, saving millions of people earning somewhere between $150,000 and $750,000 from paying this tax, and reducing the AMT for most other individuals who will end up paying this tax.
Payroll Tax Cuts Expired
The Act restores the pre-2011 Social Security tax rate of 6.2% on all non-government employees, after two years at a reduced rate of 4.2%. Physicians earning more than $113,700 should expect to pay an additional $2,274 in social security taxes in 2013 than in each of the previous two years.
Section 179 Deduction Limit Maintained at Half A Million
For those of you who are practice owners, you will be able to write off up to $500,000 in equipment and machinery purchases under Section 179 in 2013, and this amount is retroactive for 2012 as well. Prior to the legislation, the available Section 179 would have been drastically reduced to a paltry $25,000 in 2013. Under Section 179 of the IRS Tax Code, a taxpayer can elect to write-off the cost of equipment purchased and placed into business use during the year instead of ?depreciating? those assets over their useful life of 5 or 7 years, allowing for a much larger upfront tax deduction.
With the top marginal tax rate as high as it?s been in several years, and the new Medicare tax on investment income kicking in on January 1st, what can you do to minimize your tax burden?
Invest in retirement
Always a good idea, socking away money in retirement accounts is even more valuable now when it means saving 39.6% in federal income taxes and allowing your investment to grow tax-deferred. You should also consider rebalancing your portfolio, putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.
Contribute to a 529 plan
With investment income taxes higher in 2013, take the opportunity to invest in a 529 plan to begin planning for your child?s college education. All earnings in a 529 plan are tax-free, provided that the funds are used to pay for college. And many states even allow you to deduct a 529 contribution on your state tax return. The annual maximum contribution into these tax-advantaged college savings plans is $14,000 per child per year for Gift Tax purposes (or $28,000 for spouses splitting gifts), however, you can frontload five year?s worth of contributions all in one year. Don?t forget to file a Gift Tax Return if you contribute more than $14k ($28k if married) into 529 accounts in one calendar year on behalf of a child.
Purchase needed equipment and machinery for your practice
With the fate of the Section 179 deduction up in the air past 2013, it might be in your best interest to buy big-ticket equipment and machinery during the year to take advantage of the immediate deduction.
Employ your spouse and children
If there?s extra work to be done at your practice, putting your children and spouse on your payroll can be a great way to shift income to a lower tax bracket (in your child?s case) and enable your spouse to put away the maximum ($17,500 for 2013) pre-tax into a 401k retirement fund. Moreover, your child can fund a Roth IRA with the money they earn, up to a maximum of $5,500 in 2013.
Establish a Health Savings Account
If you have a qualified high-deductible health insurance plan, take advantage of the opportunity to pair it with a Health Savings Account (HSA). Contributions to an HSA are tax-deductible, grow tax-deferred, and allow tax-free distributions to cover your family?s health care costs. Plus, any money remaining in the HSA is available penalty-free to supplement your retirement once you reach age 65. The maximum contribution into an HSA for 2013 is $6,450 for married couples and $3,250 for single individuals.
The Big Picture
By and large, the American Taxpayer Relief Act maintained the status quo for most lower and middle-income Americans by extending many provisions into 2013 and making permanent many others. Those of you at the upper end of the income spectrum, however, may not feel as lucky. If that?s the case, perhaps you can take solace in the fact the Act did shunt some of the drastic tax increases set to take place. If there?s little comfort in that, remember that things could be much worse: The top marginal rate, a little more than 30 years ago, was at 70% after all.
Michael Bohigian, EA, is a staff accountant at Schwartz & Schwartz PC with a MS in Accounting and an MBA from Boston College.