|
|
Retirement planning should be one of the hot topics to discuss with your financial counselor, no matter your age, especially today when people have a much longer, self-funded retirement to look forward to (the average American spends twenty to thirty years in retirement).
|
|
Whether you are already enrolled in one or several retirement plans, or contemplating to do so, this newsletter will offer you an insight into the qualified retirement plans contribution limits.
|
|
|
|
Qualified retirement plans meet the requirements of the Internal revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and are thus eligible for favorable tax treatment.
|
|
|
- ERISA is the federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans, and it covers two types of pension plans: defined benefit plans and defined contribution plans.
|
|
|
A defined benefit plan promises a specified monthly benefit at retirement, or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).
|
|
|
Defined benefit plans usually pay out benefits in the form of a life annuity. This annuity generally begins at the plan's stated retirement age and ends when the accountholder dies.
|
|
| Generally, the employer makes contributions, but, sometimes, employee contributions are either required or voluntary. |
|
| In 2014 and 2015, the annual benefit payable at retirement can be as high as $210,000 per year. As a result, annual contributions into a Defined Benefit Plan can be as large as $210,000 and even larger in some cases in order to meet that level of retirement income target. |
|
A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually.
|
|
|
These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments.
|
|
| Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. |
|
| As mentioned above, employers can contribute to these plans and they can do it in two ways: |
|
- Employer matching contributions. If the plan document permits, the employer can make matching contributions for an employee who contributes elective deferrals (for example, 50 cents for each dollar deferred). Employer matching contributions can be discretionary (contributed in some years and not in others, depending on the company’s decision) or mandatory, as in SIMPLE plans and Safe Harbor 401(k) plans.
|
|
- Employer discretionary or nonelective contributions. If the plan document permits, the employer can make contributions other than matching contributions for participants. These contributions are made on behalf of all employees who are plan participants, including participants who choose not to contribute elective deferrals.
|
|
|
|
|
| Types of employee contributions include: |
|
- Salary reduction/elective deferral contributions are pre-tax employee contributions that are a generally a percentage of the employee's compensation. Some plans permit the employee to contribute a specific dollar amount each pay period. 401(k), 403(b) or SIMPLE IRA plans may permit elective deferral contributions. Elective Deferrals are amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.
|
|
- Designated Roth contributions are a type of elective contribution that, unlike pre-tax elective contributions, are currently includible in gross income but tax-free when distributed. 401(k), 403(b) and governmental 457(b) plans can allow them. If a plan permits designated Roth contributions, it must also offer pre-tax elective deferral contributions.
|
|
- After-tax contributions are contributions from compensation (other than Roth contributions) that an employee must include in income on his or her tax return. If a plan allows after-tax contributions, they are not excluded from income and an employee cannot deduct them on his or her tax return.
|
|
- Catch-up contributions. If permitted by a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up elective deferral contributions beyond the basic limit on elective deferrals.
|
|
|
There are limits to how much employers and employees can contribute to a plan (or IRA) established each year, as they are subject to cost of living adjustments. The plan must specifically state that contributions or benefits cannot exceed certain limits. The limits differ depending on the type of plan.
|
|
|
| Here is a table of maximum allowed dollar contributions for most common retirement plans for years 2014-2015. |
|
|
2014 |
2015 |
Annual employee contribution limit for 401(k), 403(b), or 457 savings plans
|
$17,500 |
$18,000 |
Annual catch-up contribution limit for 401(k), 403(b) or 457 savings plans if employee is age 50 or over
|
$5,500 |
$6,000 |
Annual limit for combined employer - employee contributions to a defined contribution plan
|
$52,000 |
$53,000 |
Annual contribution limit to an IRA
|
$5,500 |
$5,500 |
Annual catch-up contribution limit for IRAs for individuals age 50 or over
|
$1,000 |
$1,000 |
Annual employee contribution for SIMPLE plans
|
$12,000 |
$12,000 |
Annual catch-up employee contribution for SIMPLE plans if employee is age 50 and over
|
$2,500 |
$2,500 |
|
|
Retirement is often referred to as the golden period of life. To make sure that this golden period of rest and relaxation will turn up the way you expect it to, you need to plan for retirement in advance.
|
|
| If you haven’t done so already, make sure you ask for professional help to enroll in the most suitable retirement plan for your specific situation. |
|
|
|
|
