2015 tax law changes

For retirement savers, 2015 is already shaping up to be an important year with new guidelines from the IRS about tax-advantaged saving. While many savers will be eligible to contribute more next year based on higher income and contribution limits, new restrictions on IRA and Flexible Spending Account (FSA) rollovers require planning ahead.

Here are some of the key changes you need to know. Betterment is not a tax advisor, and this should not be considered tax advice.

1. Higher Employer Plan Contribution Limits

Taxpayers will be able to contribute up to $18,000 to their 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan in 2015. The catch-up contribution limit will also increase to $6,000 in 2015 for a total contribution limit of $24,000 for employees age 50 and older. Read the IRS guidelines.

2. Higher Income Limits for IRA Contributions

Income limits for deductible contributions to IRAs vary based on whether the taxpayer and/or the spouse are eligible to participate in an employer-sponsored retirement plan. The tax deduction for making a traditional IRA contribution is phased out for investors who have a workplace retirement plan and a modified adjusted gross income of more than $61,000 but less than $71,000 for individuals, and more than $98,000 but less than $118,000 for couples in 2015.

For individuals who don’t have a workplace retirement plan but are married to someone who does, the tax deduction for an IRA contribution is phased out if the couple’s income is more than $183,000 but less than $193,000 in 2015.

The maximum contribution for an IRA has not changed for 2015 and remains at $5,500 for people under 50, with an additional catch-up of $1,000 for those 50 and older for a total of $6,500. Read the IRS guidelines.

3. Higher Income Limits for Roth IRA Contributions

The income limits for contributing to a Roth IRA will increase by $2,000 in 2015. The new limits are $116,000 or more but less than $131,000 for individuals, and $183,000 or more but less than $193,000 for married couples.

You can have both a traditional and Roth IRA, but you can only contribute a maximum of $5,500 (or $6,500 if you’re 50 or older) across both accounts each year. Read the IRS guidelines.

4. Limitation on IRA Rollovers

Beginning on Jan. 1, 2015, investors are limited to one rollover from one IRA to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax, as long as that rollover remains in the IRA.

This is essentially a limit on what has been typically called an ‘indirect rollover’—where an IRA owner takes a distribution of all or part of the account and moves it into a new IRA.

The good news is that there is no limit on trustee-to-trustee transfers between IRAs or conversions from traditional to Roth IRAs in the same year. This transfer method—also called a direct rollover—lets you move IRA funds between accounts without taking control of the money, similar to how you would roll a 401(k) into an IRA. Read the IRS guidelines.

5. Changes in Health Expense Accounts

Health Flexible Spending Accounts (FSAs) are used to save pre-tax dollars to pay for healthcare expenses. They must be used within a plan year.

Since 2013, you have been allowed to roll over $500 from an FSA into the next plan year. However, there is a change coming in 2015 that may restrict the benefit for those who are considering contributing to a Health Savings Account (HSA).

If you have a balance in your FSA at the end of 2014 and you carry over $500 of it into 2015, you will be ineligible to participate in an HSA in 2015. This restriction does not apply to FSAs for specific uses, such as dependent care or dental expenses.

Based on this new restriction, you should plan ahead and balance the benefit of each option. If you want to set up an HSA for 2015, it may actually be better not to carry forward those unused FSA amounts, even if it means that you will lose them.

The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) rises to $2,550, up $50 from the amount for 2014. Read the IRS guidelines.

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