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