November 7, 2013
 
Retirement Plans: Strategies to Combat Higher Taxes and Grow Savings
 
Beginning in 2013, income taxes will increase significantly for higher-income individuals.  For all individuals, one of the few remaining strategies to reduce income taxes is to maximize your tax-advantaged saving opportunities.  Below, we offer our strategies for achieving lower taxes and higher retirement savings.
 
Strategies for All Employees
  • Maximize your 401(k) contributions.
    • Through the end of 2013, be sure to maximize your desired 401(k) contributions to be deducted from your calendar year 2013 compensation.
    • Beginning with your first payroll in 2014, be sure to start saving your desired amount of 401(k) contributions to be deducted from your 2014 compensation.
    • For 2013 and 2014, the annual limit for your 401(k) contribution is $17,500 or $23,000 if age 50.
  • Maximize your share of your employer's contributions.
  • Receive up to $2,000 of the Saver's Tax Credit based on your 401(k) contributions.  (Note: Your credit depends on your tax filing status and Adjusted Gross Income (AGI).  For 2013, the credit is available for "married joint" filers with AGI of $59,000 or less and for "single" filers with AGI of $29,500 or less.)

Strategies for Employers

  • Consider the potential benefits of adding a Cash Balance defined benefit plan as a supplement to your 401(k) plan.  For example, with both plans in place, an individual's maximum annual tax-deductible contributions could be in the range of $140,000 to $270,000 for individuals age 40 to 60.
  • Consider the potential benefits of a Non-Qualified Deferred Compensation (NQDC) plan as a supplement to your existing tax-qualified retirement plans.  NQDC plans must cover only a select group of management or highly compensated employees.  These plans are not subject to ERISA or to the contribution limits associated with tax-qualified plans.

Higher Limits for Retirement Plans in 2014

  • The annual compensation limit will increase from $255,000 to $260,000.  This increase is positive because more compensation may be considered for contribution purposes and for non-discrimination testing.
  • The annual addition limit (which applies to the sum of all employee and employer contributions, plus any forfeiture allocations) will increase from $51,000 to $52,000.  This increase is helpful in maximizing total contributions.
  • Coupling the annual addition limit with the 401(k) catch-up contribution of $5,500, a participant who is age 50 or older could receive a total contribution in 2014 of up to $57,500.  Depending on the employer's level of contribution, an individual could reach this maximum amount through various combinations of employee 401(k) contributions and employer contributions; e.g. $23,000 in 401(k) contributions and $34,500 from employer, or $5,500 of employee 401(k) catch-up contributions and $52,000 from the employer.
  • See our summary of the new plan limits for 2014 as compared to 2013.

 

2013 increases in income taxes for higher-income individuals
  • Top marginal rate is 39.6%.
  • Top rate for long-term capital gains and qualifying dividend income is 23.8% (including the new 3.8% Medicare tax).
  • Top rate for short-term capital gains and non-qualifying dividend income is 43.4% (including the new 3.8% Medicare tax).
  • Additional Medicare tax on wages and self-employment income is 0.9%.
  • New Medicare tax on net investment income is 3.8%.
  • Phase-out of personal exemptions and itemized deductions could increase effective tax rates by several percentage points, depending on your levels of income and deductions.

(Important note: The above information is intended to be a brief summary of 2013 income tax changes.  Please consult your tax professional for individual, specific information and advice.)

 

Please let us know if you'd like additional information or if you'd like to explore specific ways to increase your tax deductions and your retirement savings.