Life Changes

IRS changes the 401(k) rules for 2015

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Taxpayers are about to get a bit more elbow room for retirement savings. Many contribution limits for employees with tax-favored retirement savings accounts were expanded for 2015, the Internal Revenue Service said Thursday.

The maximum for contributions in the government's Thrift Savings Plan, private sector 401(k)s and other comparable programs have been raised to $18,000, up from $17,500 in 2014 and 2013. For people over 50 years old, the "catch-up contribution" threshold has been increased from $5,500 to $6,000.

"You look at the $18,000 and wonder, gee, how many people can practically get to that level?" said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. But as people "progress in their careers and earnings progressively go up," it will be increasingly important for elderly investors to max out the $24,000 limit, he said.

That's the combined total investment limit for people 50 and older—$18,000 for the 401(k) plus $6,000 for catch up.

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"For those over 50 years of age—a group that needs to be far more aggressive about saving—the fact that they can get $24,000 a year in contribution is a strong message for them to save at a significant rate," said Kevin Crain, Bank of America Merrill Lynch's managing director with more than 30 years of experience in the retirement industry.

"If you look back to 2009, limits on 401(k) were around $16,000. These aren't huge bumps but it's slowly incrementing upwards and it's a nice message on the opportunity and power to save," Crain said.

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If a worker is investing in both an after-tax Roth TSP (where withdrawals are tax-free), as well as a pretax TSP, then the $18,000 contribution limit applies to the amalgamation of both accounts.

For small business owners and self-employed workers that invest in an SEP-IRA or a single 401(k), the 2015 annual contribution limit rises to $53,000, a jump from $52,000 in 2014.

People who max out their contributions remain a minority but that group is growing, Crain said. In general, about 15 to 20 percent of active contributors max out their contribution limit, he said.

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Some programs are unchanged. For Individual Retirement Accounts, the $5,500 limit will stay the same for 2015. Annual benefits from a defined benefit plan will stay at $210,000.

The adjustments were triggered by an increase in cost-of-living expenses. The secretary of the Treasury is required to adjust limits annually to reflect cost-of-living increases.

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Here is the IRS's full list of pension plan adjustments for 2015.