The ability to retire starts with funding your retirement accounts. Funding retirement accounts must be done by specific due dates outlined by the IRS. Retirement accounts are one of the very few tax advantages that do not have to be paid or funded in the tax year (many can be funded several months after December 31). Below are the most popular types of retirement plans and the 2015 Retirement Plan Contribution Limits, but this is not an all-inclusive list.
|Type of Account||Deadline for 2015 Contribution||2015 Contribution Limit|
|Traditional IRA||April 18, 2016||$5,500 (under 50)|
|Roth IRA||April 18, 2016||$5,500 (under 50)|
|SIMPLE IRA||ER Portion 10/15/16 or 10/17/16||3% of salary up to $265k|
|EE Portion withing 30 days of pay||$12,500 (under 50)|
|401 (k)||ER Portion 10/15/16 or 10/17/16||Up to $53k per EE|
|EE Portion withing 7 days of pay||$18,000 (under 50)|
ER is Employer
EE is Employee All of the above plans have limitations including an income phase out (for example, if the adjusted gross income on your personal income tax return is over $193,000 then you cannot contribute to a Roth IRA). The information contained is meant to be a general guideline and does not include all of the possible limitations or intricacies of the retirement plans. It is important to discuss the specific plans, due dates, and all limitations with your financial services provider or tax professional. Further information for each of the plans mentioned above is below:
The traditional IRA (individual retirement account) was established by the Employee Retirement Income Security Act of 1974. The basic structure of the traditional IRA is that you contribute funds currently, get a current tax benefit, and then you pay tax on the money when you distribute the funds in the future. The deadline for making prior year IRA contributions is April 15 (or the first business day following if on holiday or weekend).
The Roth IRA was established by the Taxpayer Relief Act of 1997. The Roth IRA is funded with after-tax money but then it grows tax-free. You do not get a current year tax benefit for the contribution to the Roth IRA. You are able to withdraw your contributions from a Roth IRA at any time with no tax due. The gains in your Roth IRA are not taxed unless you withdraw the gains prior to retirement age (currently 59.5 years old). Also, high-income taxpayers may not contribute to a Roth IRA if their income is over the amount set by the IRS. The deadline for making Roth IRA contributions is also April 15 (or the first business day following if on holiday or weekend).
The SIMPLE IRA was established by the Small Business Job Protection Act of 1996. The SIMPLE IRA is an employer-sponsored plan but follows many of the same rules as a traditional IRA. The SIMPLE IRA cannot be established by an individual unless the individual is self-employed and files a Schedule C. The benefit of the SIMPLE IRA is that it has higher contribution limits than the traditional IRA. If the employer has employees, then the employer must either match the employee’s contribution up to 3% or contribute 2% to all employees regardless if the employee makes a contribution. The SIMPLE IRA plan must be established by October 1 of the tax year. The employee funds that are contributed through payroll deductions must be deposited within 30 days of month in which they were withheld. The employer matching funds are due by the business tax return due date including extensions (currently either September 15 or October 15 depending on entity type).
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As the name suggests, the 401(k) plan is defined in subsection 401(k) of the IRS Code. This part of the IRS Code was enacted in 1978. The 401(k) plan typically gets funded by two sources; employee paycheck deferrals and employer matching contributions. The employer must submit the employee deferral amounts “as soon as the employee assets can be reasonably segregated from employer assets…” This definition is fairly vague so the Department of Labor clarified by saying that the employee deferrals would be compliant as long as they were made within seven business days of the date of payroll deduction. The employer matching contributions are due by the tax return due date including extensions (September 15 or October 17, 2016, depending on entity type). The 401(k) plans also contain the ability for employers to make a “profit sharing” contribution into the employee’s 401(k) accounts. With the employee deferrals, employer matching, and profit sharing contribution, the limit to contribute to the 401(k) is much higher than other plans at $53,000 (under age 50) or $59,000 (age 50 or over).
As previously stated, the contribution limits, due dates, income limits, etc. can all be confusing so it is best to seek professional advice. Funding retirement accounts can make a huge impact on your ability to retire, so it is important to know what types of plans are available to help you meet your goals.
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