As your clients prepare their annual New Year’s Resolutions this month, you should stress that they include putting more into their retirement pension plan.
The reason is simple: to take advantage of the recent IRS decision to raise the 2015 Pension Plan Limitations. In a not unexpected move, the IRS has announced that taxpayers may contribute up to $18,000 into their 401(k) plans in the New Year. That represents a $500 increase from the 2014 limits.
“I would say that is a very typical increase. Given the rate of inflation that we’re seeing right now, that is pretty much what was expected,” said Karla McAvoy, a financial planner with HC Financial Advisors in Lafayette, CA.
A $500 increase may not sound like a lot, but it is close to a 3 percent annual increase, and multiplied over an individual’s working career can be a substantial sum of money. And next to Social Security benefits, a pension plan can be the primary source of retirement funds for many Americans.
“As a financial planner, I always hope that people will maximize the amount they [contribute]. Depending on their tax rate, this could be a tiny difference in cash flow month-to-month,” McAvoy said.
Financial planners should also advise clients to take advantage of the increased limit on so-called catch-up contributions, if they qualify.
The catch-up contribution is “intended for people that are closer to retirement, so that people 50 and over get a chance to contribute a little bit extra each year,” McAvoy said. “It was $5,500 last year. It is going up to $6,000. The idea is that there are many people that haven’t saved enough for retirement. This gives them a pre-tax contribution to help them get to the level that they need to be at to retire.”
The IRS move is especially good news for an older worker of course, said Susan MacMichael John, president of Financial Focus Inc., in Wolfeboro, NH.
“It’s pretty good because in addition to increasing the normal contribution by $500 they increased the catch-up contribution by another $500, so it’s actually an additional $1,000 that somebody could put away if they’re over 50,” John said.
A full slate of changes, driven by the economy
There are other changes impacting pension plan contributions next year, mostly in response to inflation. According to the IRS announcement, “Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.”
Among the more notable changes to the 2015 retirement plan limits are the following:
• The maximum 401(k) annual referral increases from $17,500 in 2014 to $18,000 in 2015
• The maximum 50+ catch-up contribution increases from $5,500 in 2014 to $6,000 in 2015
• The 415 maximum defined contribution (DC) plan annual addition increases from $52,000 in 2014 to $53,000 in 2015
• The 415 defined benefit (DB) “dollar” limit remains unchanged in 2015, at $210,000
• The highly compensated employee (HCE) increases from $115,000 in 2014 to $120,000 in 2015
• The 401(a)(17) compensation limit increases from $260,000 in 2014 to $265,000 in 2015
• The Social Security taxable wage base increases from $117,000 in 2014 to $118,500 in 2015
A full list of changes, with analysis of their impacts, can be found here.
Growing pension plan interest with younger workers
The other good news on the pension plan front doesn’t come from an IRS announcement, but from increased interest in them among many younger workers. While pension plans have historically often been viewed as something to worry about at a later point in one’s career, they are starting to hold more appeal.
“Younger clients typically do not want to maximize their contributions, largely because they’re not making enough money to make that maximum contribution,” McAvoy said. “It’s also far more difficult for someone at a younger age, especially when they’re just starting to work, to envision just how much they’re going to need at the end.”
But that mindset is starting to change, driven largely by concerns over Social Security, or rather, the belief by many young workers that there will be no Social Security benefits left for them.
“I think they feel they’re on their own with this, and that they better get going with saving,” McAvoy said. “They’ve also seen some tough economic times, very formidable years for them, and hopefully they are learning some things that some of us older folks did not learn, and are really going to start saving early.”
John agrees, and said it is important for financial planners to stress the importance of putting as much aside as early as possible.
As to what is most on the minds of her clients when it comes to Social Security and retirement accounts, John said it is “whether Social Security is going to be available for their kids and their grand-kids. That’s really what is most on their minds; and they’re pretty pessimistic.”
And like McAvoy, John said that pessimism is driving more interest in pension plans for younger workers.
“We’re beginning to have a lot of millennial clients, and they don’t even consider Social Security to be in their retirement picture at all,” John said. “It’s interesting. As a result, they become more interested in their retirement at an earlier age than some of the people that are approaching retirement age.”