IRS Retirement Contribution and Income Limits for 2014

Maxing out contributions to your retirement plan is a smart way to build your nest egg and take advantage of some important tax benefits. The amount you can sock away varies from one plan to the next so it pays to know how much you can save. The IRS routinely adjusts the annual contribution and income limits for retirement accounts to keep up with inflation (compare with 2013). If you’re working on your savings strategy for the new year, here are the numbers you need to keep in mind.

Employer-Sponsored Plans

If you work for a larger company, you may have the option of enrolling in a defined contribution plan or defined benefit plan. Defined contribution plans can be funded by the employer, employee or both. The most common types of defined contribution plans include 401(k)s, 403(b) plans, 457 plans, and the Thrift Savings Plan, which is available to federal employees.

A defined benefit plan is typically only funded by the employer, although some plans may allow employees to chip in. These plans pay you a set amount of money at retirement based on your years of service and salary. A traditional pension plan is the best example of a defined benefit plan.

For 2014, the limit on employee contributions to a 401(k) or similar plan is $17,500, the same as last year. The catch-up contribution amount for workers aged 50 or older also remains the same at $5,500. The IRS did bump up the total annual limit for combined employee and employer contributions to $52,000, an increase of $1,000 over last year’s limit. The maximum annual benefit you can receive from a defined benefit plan also increased by $5,000 to $210,000.

Individual Retirement Accounts

An Individual Retirement Account is a great option if you’re looking to supplement your existing retirement plan or if your employer doesn’t offer a savings option. A
traditional IRA allows you to defer paying taxes on the money until you start making withdrawals. As an added bonus, you may be able to deduct some or all of your contributions. A Roth IRA is funded with after-tax dollars so you don’t get the deduction but your qualified withdrawals are always tax-free.

This year, the maximum annual contribution limit remains at $5,500 or $6,500 if you’re 50 or older. The IRS did, however, make some changes to the modified adjusted gross income limits for Roth IRA contributions and traditional IRA deductions.

If you file single or head of household, your ability to contribute to a Roth is phased out if your AGI is more than $129,000. That’s a $2,000 increase over last year. The AGI phase-out limit for married couples filing jointly also increased to $191,000, up from $188,000 in 2010. If you’re married but you file separate returns, the phase-out limit remains the same at $10,000.

If you’re looking to deduct your contributions to a traditional IRA, you can deduct your full contribution regardless of income if you’re not covered by an employer’s retirement plan. If you do contribute to a retirement plan through your job, the deduction phases out at $70,000 for single filers and heads of household and $116,000 for married couples filing jointly. Both figures were increased by $1,000 over the 2013 limits.

If you’re married and you’re not covered by an employer’s plan but your spouse is, your ability to deduct traditional IRA contributions is phased out at $191,000. The phase-out limit was $188,000 last year.

Small Business and Self-Employed Plans

If you own a business or you work for a smaller company, your retirement savings options may include a SIMPLE or SEP IRA. A SIMPLE IRA is designed for businesses with 100 employees or less. Employers are required to contribute but it’s optional for employees. A SEP IRA can be funded only by the employer but you can set one up for yourself if you’re self-employed.

For 2014, the contribution limit for SIMPLE plans remains at $12,000. For SEP IRAs, employers can put in up to 25% of the employee’s compensation or $52,000, whichever is less. The max contribution limit was $51,000 for 2013.

Other Key Changes

The IRS also made a few other important adjustments this year that could potentially affect your tax situation. The qualifying income limits for the Retirement Savers’ Tax Credit was increased to $60,000 for joint filers, $45,000 for those who file head of household and $30,000 if you’re single or married but you file jointly. The credit, which is designed to benefit middle and low-income workers who save for retirement, is good for up to $2,000, depending on your filing status.

The IRS also made a 1.5 cost-of-living increase to 2014 Social Security benefits and bumped the Social Security taxable wage base up to $117,000. That’s the max amount of income subject to Social Security withholding. The personal exemption amount for 2014 went up by $50 to $3,950 and the federal estate tax exemption increased to $5.34 million. The gift tax exemption stays the same, at $14,000.

Making sense of the tax code isn’t easy but it’s important to keep up with changes that could impact your tax or retirement situation. Knowing how much you can squirrel away is key to maxing out your savings goals.