Maximizing your contributions to any retirement account (e.g. 401(k), Roth IRA) is one proven strategy to build retirement wealth. This is especially important if you are a business owner or an employee. The combination of tax benefits, matching contributions and the power of compound interest over time are both excellent ways to capitalize on a tested method of preparing for retirement.
In 2015, the IRS increased the 401(k) contribution limit to $18,000, and maintained the IRA contribution amount of $5,500 ($6,500 if over age 50) to help you reach your retirement savings goals. While the limits on the various tax-deferred retirement accounts are straightforward (as seen in the charts below), there are some exceptions for specific cases.
For instance, if you participate in a retirement plan at work, you can still make contributions to a Roth IRA or traditional plan. The IRS, however, says “you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work.” The IRS also said that Roth IRA contributions may be limited if your income exceeds a certain level.
There also are similar restrictions for people that meet certain conditions. Those include people who may have to pay taxes if they make contributions in excess of the contribution limits, those participating in spousal IRAs and those making contributions to a retirement account after age 70 ½. See the IRS web site for more specifics.
Estate Planning Options
On a related note, what if you are looking for ways to implement an estate planning strategy while maximizing your charitable and family distributions? What is the best strategy to meet tax requirements while efficiently distributing assets to continue your legacy?
As it turns out, this is not an uncommon situation. The good news is that there are several approaches you can take to meet both needs.
Start a Roth IRA for a Child
If you want to gift to a young child, starting a Roth IRA may be appropriate. In this instance, if your granddaughter earns $1,000 being a lifeguard and would otherwise qualify, she could put $1,000 into a Roth IRA. Alternately, if she saved half of what she made, you could gift a matching contribution of $500 to allow her to put the full $1,000 into the Roth IRA. Kids need to earn money if you are going to contribute to an IRA on their behalf. For the 2014 tax year, the limit for a Roth IRA contribution for those under 50 is the lesser of the worker’s earnings or $5,500.
2015 Contribution Limits
Here are the 2015 IRS contribution limits for retirement savings accounts, including contribution limits for 401(k), 403(b) and most 457 plans. A 457 plan is a non-qualified, deferred compensation arrangement created by state and local governments, tax-exempt governments and tax-exempt employers. These charts also list the income limits for IRA contribution deductibility.