With colder temperatures across the nation, and the holidays finally behind us, many financially savvy individuals and households have already began to turn their thoughts to taxes; specifically, the changes made by Congress and the IRS for 2015 that impact Individual Retirement Accounts and 401 (k) retirement plans. Several significant changes in store for this coming year will potentially save taxpayers money, but one change in particular could result in significant financial costs.The professionals at Optima Tax Relief can help assure that you are able to take the maximum advantage of all available tax breaks.
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For many low and moderate income taxpayers, saving for retirement is difficult. Putting aside thousands of dollars in an IRA or 401(k) plan often simply doesn’t happen. The myRA plan, announced by President Obama in his 2014 State of the Union address, is designed to make saving for retirement easier for individuals who are employed but who don’t have access to workplace retirement plans.
Still under development, the myRA program is modeled after Roth IRAs. Both retirement plans share several features. Both Roth IRAs and myRAs are funded with after-tax dollars, which means that contributions are not tax deductible. But withdrawals of contributions are also tax-exempt. And, just as with Roth IRAs, withdrawals of earnings from myRA plans are also tax-exempt for taxpayers who are at least 59 ½ years old.
Individual taxpayers with annual incomes up to $129,000 are eligible to participate in the myRA program; taxpayers filing as married or head of household can have annual incomes up to $191,000. The minimum to open a myRA account is just $25, contributions can be as small as $5 per pay period. The myRA program limits contributions to $5,500 per year for taxpayers under age 50, and $6,500 per year for older taxpayers. Balances for myRA accounts are limited to $15,000; larger balances must be transferred into conventional Roth IRAs.
Higher IRA Income Limits
The IRS has also set higher maximum income limits for taxpayers who opt to participate in traditional and Roth IRA plans for 2015. Taxpayers with incomes above specified limits may contribute to a traditional IRA but cannot defer paying taxes on their contributions. Taxpayers whose incomes exceed specified limits cannot contribute to Roth IRAs at all, with very limited exceptions.Taxpayers who are eligible can contribute to both Roth and traditional IRAs as long as they adhere to annual contributions limits, which remained unchanged for 2015 federal income tax returns.
Individual taxpayers with modified adjusted gross incomes between $61,000 and $71,000 who have access to retirement plans at work are phased out of receiving tax breaks for traditional IRAs; couples with MAGIs between $98,000 and $118,000 are also phased out of tax breaks traditional IRAs for 2015. These limits represent increases of $1,000 for individual taxpayers and $2,000 for couples over 2014 limits. Married individuals who do not have access to workplace based retirement plans but whose spouses do have access to such plans are phased out of tax breaks for individual IRAs with a MAGI between $183,000 and $193,000.
The IRS has increased maximum income limits for Roth IRAs by $2,000 for 2015 for individual and married taxpayers. Individual taxpayers with MAGIs between $116,000 and $131,000 are phased out of eligibility for Roth IRAs. Married couples with MAGIs between $183,000 to $193,000 are phased out of eligibility for Roth IRAs.
The “Fresh Start” on IRA Rollovers
Through rollovers, individual taxpayers are allowed to withdraw funds from their traditional or Roth IRAs without generating tax penalties, as long as the funds were redeposited in the same type of IRA within 60 days. Previously, the IRS imposed a limit of one rollover per IRA every 12 months. This meant that taxpayers with a Roth and a traditional IRA could conceivably execute two rollovers annually without tax penalties.
However, the Tax Court recently reinterpreted the rule to limit each taxpayer to one rollover every 12 months. To minimize penalizing taxpayers who executed rollovers late in 2014, the IRS imposed a “fresh start” on enforcing the new interpretation of the rule.No rollovers initiated or completed during 2014 would be subject to the new rule. Nonetheless, this change could potentially generate millions for the IRS in penalties.
Higher Income Limits for Saver’s Credits
The Saver’s Credits allows low and middle income taxpayers who participate in IRA or 401(k) plans to claim tax credits. Individual taxpayers can claim credits up to $1,000; married taxpayers and heads of household can claim credits of up to $2,000. Income limits for the saver’s credit program have been increased for 2015. AGI limits for individual taxpayers increased from $30,000 in 2014 to $30,500 in 2015. Maximum AGI for heads of household is 45, 750, increased from $45,000 in 2015. For married couples the maximum is $61,000, $1,000 higher than the limit for 2014.
Increases in 401(k) Contribution Limits
The IRS has also increased contribution limits for 401 (k) accounts. For 2015, taxpayers may contribute up to $18,000 to an individual 401 (k) account. This maximum represents an increase of $500 over the maximum 401 (k) contribution of $17,500 set for 2014. This increase also applies to the 403(b), 457 and Thrift Savings Plans.
Dollars and Cents
Trying to keep up with the intricacies of the tax code can give anyone a headache. If you’re confused about how changes in tax laws regarding retirement plans apply to you, there’s nothing wrong with seeking help. An accountant or attorney who specializes in tax law – like the professionals at Optima Tax Relief, can translate the legalese generated by Congress and the IRS into plain English, and help ensure that you are able to take full advantage of all the tax breaks to which you are entitled.