Last week the IRS announced retirement plan contribution limits for 2015. And the good news: they are up!
Starting next year, you can sock away the retirement plan contribution limit, or $18,000 in your deferred compensation plan or 401k account at work. Even if you are a teacher or nurse with a 403b Annuity, you can also contribute up to $18,000 to your retirement plan.
And if you are 50 years of age or more, in 2015 you can save an additional $6000 retirement plan contribution, as a catch-up contribution, for a total of $24,000 saved in a year.
If you are self-employed and have a Simplified Employee Pension (SEP), starting next year your retirement plan contribution limit goes up to $53,000.
But for some unknown reason, the plain old IRA contributions do not get a bump. The maximum IRA contribution for 2015 remains at $5500. Silly.
Good Behavior Gets Better with a Little Incentive
Way back in the 1980’s, as a rookie broker, I opened lots and lots of accounts with $2000 IRA contributions. These were tax deductible contributions for practically everyone. Write a check on April 15th and get a tax break, simple as that. And these IRA’s were easy “new account openers” for a doe-eyed baby stockbroker (like me). But the Tax Reform Act in 1986 pretty much ended that game. That tax law ended the ability to deduct the contribution if you made more than $35,000 ($50,000 if you were married).
Hard to believe the deduction ended nearly thirty years ago.
Honestly, if you made less than $35,000, putting money into an IRA made little economic sense. At that income level, real-life issues like rent, paying student loans and other debts, and saving for a down payment become WAY more important. Keep in mind in 1986 the retirement plan contribution limit to 401k accounts was just $7000. The IRA was a helpful tool to stash more money away for retirement!
As mentioned above, good behavior gets better when there is an incentive involved. When the tax deduction was removed from the equation, most folks simply STOPPED putting money into their IRA. Yes, it makes sense to save “more” for retirement. That is good behavior. Yes, it makes sense to get years and years of tax-deferred compounding. That is a benefit of good behavior.
But take away the INCENTIVE, and people naturally stop and change their practice. Bad.
Currently, there is a LOT of opposition as corporations seek mergers with overseas companies, in an effort to lower their tax base. The United States has the highest corporate tax rate in the world. If this sounds like I’m off on a tangent, give me a moment. Personally, I don’t see this tax reduction as a problem, but some do. As a shareholder, I want these companies to do whatever it takes (legally) to maximize earnings. If taxes are high in one area of the globe, they should be free to find a better opportunity, elsewhere. Businesses — and humans — will do what is in THEIR best interests. That is human nature, and good behavior. When the Tax Reform Act of 1986 dropped the deductibility of IRA contributions, people stopped — they changed their behavior. Good habits work with a little incentive, but good habits cannot be legislated.
Saving money for retirement is a good habit. The deduction of the IRA retirement plan contribution was the incentive. Everyone KNOWS they ought to do it, but many do not. When there is an incentive (even a small incentive), more people take action.
If the “powers that be” in Washington really had our best interests in mind, they would reconsider bringing back the deductibility of IRA contributions. Many more individuals would gladly drop $2000, $5000, or whatever the retirement plan contribution limit is, into an IRA then. Congress could not have possibly given up THAT much revenue by foregoing the deduction, right? These accounts are were great ways to build savings for the future. Likewise, I believe corporate tax receipts would skyrocket if the US simply dropped their high tax rates for businesses.
Good behavior can get even better, when their is an incentive involved.