2015 will see a new contribution limit for the standard 401(k). The Internal Revenue Service (IRS) announced last October 23, 2014 that the contribution limit will be increased by $500 starting 2015. This accumulates to a total of $18,000 from the previous $17,500.
Employees aged 50 and above will also see an increase in the catch-up contributions. From a previous $5,500 the limit has gone up to $6,000, bringing their total contributions limit up to $24,000.
The Internal Revenue Service stated that this increase was to reflect upon annual inflation as indicated by the Consumer Price Index. However, one has to note that the inflation rates were not enough to warrant an increase for IRA’s, both traditional and Roth IRA’s alike.
This means that IRA contribution will remain at the $5,500 limit and the catch-up rate will retain its $1,000 cap.
There is still good news for IRA contributors, however. 2015’s new plan will now single taxpayers with an income below $131,000 to participate in a Roth account. This is an improvement from the previous $129,000 income benchmark of this year (2014). Employees earning below $116,000 will now be allowed to make the full $5,500 contribution, an improvement from the current $114,000 limit.
These improvements also reflect for married couples contributing through a joint account. Couples earning below $193,000 a year will be able to contribute, which is better than the current $191,000 minimum income requirement. Full contribution will be open if a couple jointly earns below $183,000, up from the current $181,000 requirement.
Finally, the $2,000 savers credit will now be much more accessible. By 2015, savers credit will be accessible to single retirement filers with an income below a $30,500 benchmark. As for married filers the credit will available for those earning below $61,000 annually.
The downside for some is that the Internal Revenue Service is increasing the income levels determining who can full deductions of their IRS savings. It is a give or take depending on how much a single or married taxpayer earns per year.
Does all this mean everyone will be able to optimize their retirement options and contribute the maximum limit? According to recent surveys this might not be the case.
According to a 2013 survey of Vanguard’s 401(k) participants, the company had a total of about three million contributors. Of those participants, only 36% savers with an income of at least $100,000 maxed out their contributions. The report also shows that a dwindling 2% of employees earning from $74,999 to $50,000 contributed the total amount allowed.
Employee Benefit Research Institute’s Stephen Blakely stated that there are employees who will not be able to maximize their contributions due to company restrictions and not because of income limitations. This is because every company has their own policy on how much an employee may contribute towards their 401(k) plan.
Another factor to consider is that every company has a restriction when an employee may begin to contribute. While there are some that will a hired employee to contribute immediately upon hiring, others will have a waiting period of 6 months or even one full year of employment before they may add anything to a 401(k) fund.
All in all this equates to better options for people trying to save for retirement. As the economy continues to face price increases and very few adjustments are made to compensate for this inflation, a higher contribution limit will be beneficial for many in the long run.
This rings true for people starting early. By maximizing their contributions every year, an employee could essentially save up a much higher retirement fund by the time they hit the required 59 and a half years of age.