With tax season fast approaching, remember that an easy way to reduce your taxes is to reduce your income. Contributing more to your 401(k) or IRA reduces your taxable income and your contributions grow tax-deferred, until you make withdrawals at retirement.
The IRS recently released new contribution limits for the 2015 tax year. Here are a few particularly significant changes:
- You can now contribute $18,000 (up from $17,500) into 401(k).
- If you turn 50 years old in 2015 or are older than 50, instead of being limited by the basic 401(k) contribution, you can make a catch-up contribution of $6,000 annually, increased from $5,500.
- The phase-out range on deductions for singles and heads of household who are contributing to traditional IRAs and are already covered by workplace retirement plans has increased. The phase-outs affect taxpayers with modified adjusted gross income between $61,000 and $71,000, up from $60,000 to $70,000 last year.
- For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Note that even if you don’t qualify for a tax deduction for your IRA contributions, there are other benefits. In addition to the tax-deferred growth not being subject to the 3.8% Medicare surtax, you have the option of later converting the traditional IRA to a Roth IRA. (Remember, although there are income limits that govern who can open a Roth IRA, there are no income restrictions on who can convert a traditional IRA to a Roth IRA.)
Also, you can make IRA contributions for 2014 right up until April 15, 2015. Just be sure to designate the appropriate year on your contribution form.