IRA and Retirement Plan Limits for 2014

 

Retirement LimitsIRA contribution limits

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2014 remains unchanged at $5,500 (or 100% of your earned income, if less). The maximum catch-up contribution for those age 50 or older in 2014 is $1,000, also unchanged from 2013. (You can contribute to both a traditional and Roth IRA in 2014, but your total contributions can't exceed this annual limit.)

Traditional IRA deduction limits for 2014

The income limits for determining the deductibility of traditional IRA contributions have increased for 2014 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income ("modified adjusted gross income," or MAGI) is $60,000 or less (up from $59,000 in 2013). If you're married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $96,000 or less (up from $95,000 in 2013). If you're not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $181,000 or less (up from $178,000 in 2013).

If your 2014 federal income tax filing is: Your IRA deduction is reduced if your MAGI is between: Your deduction is eliminated if your MAGI is:
Single or head of household $60,000 and $70,000 $70,000 or more
Married filing jointly or qualifying widow(er)* $96,000 and $116,000 (combined) $116,000 or more (combined)
Married filing separately $0 and $10,000 $10,000 or more

*If you're not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $181,000 to $191,000, and eliminated if your MAGI exceeds $191,000.

Roth IRA contribution limits for 2014

The income limits for Roth IRA contributions have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2014 if your MAGI is $114,000 or less (up from $112,000 in 2013). And if you're married and filing a joint return, you can make a full contribution if your MAGI is $181,000 or less (up from $178,000 in 2013). (Again, contributions can't exceed 100% of your earned income.)

If your 2014 federal income tax filing is: Your Roth IRA contribution is reduced if your MAGI is between: Your cannot contribute to a Roth IRA if your MAGI is:
Single or head of household $114,000 and $129,000 $129,000 or more
Married filing jointly or qualifying widow(er) $181,000 and $191,000 (combined) $191,000 or more (combined)
Married filing separately $0 and $10,000 $10,000 or more


Employer retirement plans

The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan in 2014 remains unchanged at $17,500. The limit also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Savings Plan. If you're age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2014 (unchanged from 2013). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can't exceed the annual limit ($17,500 in 2014 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan--a total of $35,000 in 2014 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2014 is $12,000, unchanged from 2013. The catch-up limit for those age 50 or older also remains unchanged at $2,500.

Plan Type Annual Dollar limit: Catch-up limit:
401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Savings Plan $17,500 $5,500
SIMPLE plans $12,000 $2,500

Note: Contributions can't exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2014 is $52,000 (up from $51,000 in 2013), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2014 has increased to $260,000, up from $255,000 in 2013; and the dollar threshold for determining highly compensated employees remains unchanged at $115,

How Much Annual Income Can Your Retirement Portfolio Provide?

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

 
More ways to help stretch your savings
 
Savings
  • Don't overspend early in your retirement
  • Plan IRA distributions so you can preserve tax-deferred growth as long as possible
  • Postpone taking Social Security benefits to increase payments
  • Adjust your asset allocation
  • Adjust your annual budget during years when returns are low

 

Why is your withdrawal rate important?  

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you'll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.

Current Life Expectancy Estimates

  Men Women
At birth 76.3 81.1
At age 65 82.8 854

Source: National Vital Statistics Report, Vol. 61, No. 6, October 2012

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. A seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, "Determining Withdrawal Rates Using Historical Data," Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years. More recently, Bengen used similar assumptions to show that a higher initial withdrawal rate--closer to 5%--might be possible during the early, active years of retirement if withdrawals in later years grow more slowly than inflation. 

Other studies have shown that broader portfolio diversification and rebalancing strategies also can have a significant impact on initial withdrawal rates. In an October 2004 study ("Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?," Journal of Financial Planning ) Jonathan Guyton found that adding asset classes such as international stocks and real estate helped increase portfolio longevity (although these may entail special risks). Another strategy that Guyton used in modeling initial withdrawal rates was to freeze the withdrawal amount during years of poor portfolio performance. By applying so-called decision rules that take into account portfolio performance from year to year, Guyton found it was possible to have "safe" initial withdrawal rates above 5%.

A still more flexible approach to withdrawal rates builds on Guyton's methodology ("Using Decision Rules to Create Retirement Withdrawal Profiles," Journal of Financial Planning, August 2007). William J. Klinger suggests that a withdrawal rate can be fine-tuned from year to year, using Guyton's methods but basing the initial rate on one of three retirement profiles. For example, one person might withdraw uniform inflation-adjusted amounts throughout his or her retirement. Another might choose to spend more money early in retirement and less later; still another might plan to increase withdrawals as he or she ages. This model also requires estimating the odds that the portfolio will last throughout retirement. One retiree might be comfortable with a 95% chance that his or her strategy will permit the portfolio to last throughout retirement; another might need assurance that the portfolio has a 99% chance of lifetime success. The study suggests that this more complex model might permit a higher initial withdrawal rate, but also means the annual income provided is likely to vary more over the years.

Don't forget that all these studies were based on historical data about the performance of various types of investments. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Note: Past results don't guarantee future performance.

LongevityTax considerations

Prolonging your savings may require attention to tax issues. For example, how will higher withdrawal rates affect your tax bracket? And does your withdrawal rate take into account whether you will owe taxes on that money?

Also, if you must sell investments to maintain a uniform withdrawal rate, consider the order in which you sell them. Minimizing the long-term tax consequences of withdrawals or the sale of securities could also help your portfolio last longer.

 

Inflation is a major consideration

For many people, even a 5% withdrawal rate seems low. To better understand why suggested initial withdrawal rates aren't higher, it's essential to think about how inflation can affect your retirement income.

Here's a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in an account that yields 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income--$51,500--would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio's ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it's important to take a portfolio's ups and downs into account--and the need for a relatively predictable income stream in retirement isn't the only reason. According to several studies in the late 1990s by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio's fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio's ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you'll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

 

Quotes 

"Your customer is not an interruption of your work. He or she is the reason you're at work."

                   Debra J. Schmidt 

"What we say and what we do ultimately comes back to us, so let us own our own responsibility."

                   Gloria Anzaldua 

"The road from a bad beginning to a good ending is long."

                   Unknown 

 

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

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