This time of year, retirement savers need to know how much they can contribute to an IRA, 401(k), or other type of retirement or tax advantaged savings account. Back in mid-October, I wrote about the IRS’ delay in releasing the 2014 contribution limits for retirement plans. The official IRS 2014 contribution limits were actually released later that month -- sooner than expected. So I wanted to follow up.
In respect to contribution limits for 401(k) and other defined contribution retirement plans for 2014, here is what you need to know as you begin to think about your cash flow and financial planning for 2014.
401(k), 403(b), 457, etc:
The annual limit on contributions for 2014 remains at $17,500. And if you are age 50 or older at anytime next year (even if your 50th birthday is December 31st 2014), then you can also make additional catch-up contributions (also referred to as CUC’s) into these and other tax advantaged savings plans and accounts of an additional $5,500, for a total annual contribution of $23,000.
Self-employed 401(k) plans
Self-employed folks can also set up and fund their own 401(k) profit sharing plan, which allows for the same type of contributions mentioned above. Using this type of plan, which is easily set up at any major brokerage firm, you can also make an additional contribution that is a percentage of net profit (this is the profit sharing component of the plan.)
For an individual who declares about $75,000 net profit from self employment, they total pre-tax amount they can contribute to this type of plan is about $31,000 in 2013. If they are 50 or older, they can contribute about $36,500. For self employed folks who are age 50 or older and make a profit of $180,000 or more in 2013, the maximum pre-tax contribution to this type of retirement plan for the self employed is $56,500.
IRA contribution limits
People under age 50 who have earned income from wages are allowed to contribute up to $5,500 to any type of IRA in 2014. Folks age 50 and older in 2014 can make an additional CUC of $1,000, for a total annual IRA contribution of $6,500. These limits apply to traditional IRAs and Roth IRAs.
Simple IRA contribution limits
Some self-employed folks still use Simple IRA plans. If you are under age 50, the contribution limit to those is $12,000. If you’re age 50 or older in 2014, you can contribute an additional $2,500 for a total contribution of $14,500 to a Simple IRA. Given the higher contribution limits allowed for self employed 401(k) plans, I suggest self employed folks use a self employed 401(k) plan instead of the Simple IRA.
Contributions to HSA’s
The 2014 annual contribution limit to an HSA for folks with single medical coverage is $3,300. The annual contribution limit is $6,550 for folks covered under qualifying family medical plans. But if you are age 55 or older in 2014, you can contribute an additional $1000, or $4,300 to an HSA for singles and $7,550 for families per year.
If you are enrolled in high deductible health plan, then you can take advantage of this special savings opportunity. Make it a point to set aside pre-tax money into a health savings account, or HSA because the money contributed to these special accounts grows tax deferred and can later be withdrawn tax-free when used for future qualified medical expenses.