For 2015, contribution caps rise for 401(k) plans
Good news for most people who make regular contributions to a retirement plan, either as a participant in your employer's plan or through your own self-employed plan: The amount you can contribute this year is generally higher than in 2014.
Folks who plan on maximizing their retirement savings need to know how much they can contribute to an IRA, 401(k) or other type of retirement or tax-advantaged savings account. Here are the contribution limits in 2015 for 401(k) and other defined-contribution plans.
401(k)-style plans
The annual limit on employee contributions for 401(k), 403(b) and 457 retirement plans in 2015 is $18,000, up from $17,500 in 2014. And if you're 50 or older at anytime this year (even if your 50th birthday is on Dec. 31), you can also make a higher "catch-up contribution" into these and other tax-advantaged savings plans of an additional $6,000 (up from $5,500 in 2014) for a total annual contribution of $24,000 in 2015.
Self-employed 401(k) profit sharing plans
For the self-employed, my favorite type of retirement plan is the self-employed 401(k) profit sharing plan. This type of tax-advantaged plan allows individuals to make two contributions, a profit-sharing contribution as the employer and a 401(k)-type contribution as the employee.
Since the employer profit-sharing part of the contribution varies based on your net profit, let's take a look at a few examples.
An individual who declares about $80,000 net profit from self-employment can make a contribution as an employee of up to $18,000 and a profit-sharing contribution as an employer of $14,870. This adds up to a total pretax contribution of $32,870 in 2015 -- which is more than 41 percent of net profit.
Those 50 or older can contribute about $38,870, or more than 48 percent of net profit.
Those 50 or older who make a profit of $185,000 or more in 2015 have a maximum pretax contribution capped at $59,000. As you can see, this plan allows for a whopping pretax contribution amount, which is why it's my favorite type of plan for the self-employed.
Simple IRA plans
If you're under 50, the limit for this special type of retirement account for the self-employed is increased to $12,500 in 2015 ($500 higher than in 2014.) If you're 50 or older in 2015, you can contribute an additional $3,000 (also $500 higher) for a total Simple IRA contribution of $15,500.
But because the contribution limits for self-employed 401(k) plans are so much higher, I typically advise anyone in that category to use a self-employed 401(k) profit-sharing plan instead of the Simple IRA.
IRA plans
The contribution limits for IRAs were unchanged for 2015, so those under 50 who have earned income from wages can still contribute up to $5,500 to any type of IRA this year. Those 50 and older in 2015 can also make a catch-up contribution of $1,000, for a total of $6,500. These limits apply to traditional IRAs and Roth IRAs.