Social Security
Changes to the Federal Insurance Contribution Act (FICA) have raised the taxable limit on wages for the Social Security portion to $117,000 from $113,700 in 2013 with the tax rate set at 6.2% for both the employee and the employer, respectively. About 10 million (of 165 million workers) will pay higher taxes as a result of this increase, according to the Social Security office. The Medicare tax is the other part of FICA. That tax is now 0.9% for wages above $200,000, although this is paid by the employer.
The IRS also changed the federal income tax withholding tables and allowance amounts. According to the IRS:
1. The personal exemption amount has been increased to $3,950 from $3,800.
2. Tax withholding rates for both single and married taxpayers remain unchanged; however, wage brackets for these rates have changed.
Social Security benefits for those receiving them will increase by 1.5% in 2014. This qualifies as a cost of living adjustment (COLA). There are other minor increases to the amount of retirement earnings that are tax exempt, as well as changes to disability thresholds, federal payment standards, resource limits, and student exclusions. All of the specific details can be found on the Social Security Administration’s 2014 changes summary.
Estimated average monthly Social Security benefits payable in January 2014:
| Before 1.5% COLA | After 1.5% COLA | |
| All Retired Workers | $1,275 | $1,294 |
| Aged Couple, Both Receiving Benefits | $2,080 | $2,111 |
| Widowed Mother and Two Children | $2,583 | $2,622 |
| Aged Widow(er) Alone | $1,225 | $1,243 |
| Disabled Worker, Spouse and One or More Children | $1,914 | $1,943 |
| All Disabled Workers | $1,131 | $1,148 |
According to the IRS website, the contribution limit remains at $17,500 for defined contribution plans such as 401(k), 403(b) and the majority of 457 plans. Catch-up provisions for these plans are also unchanged at $5,500 for individuals aged 50 or older.
Allowable deductions in 2014 for traditional Individual Retirement Arrangement (IRA) plans have remained the same as last year - $6,500 for people age 50 or older, and $5,500 if you are 49 or younger. The IRA phase-out limits, or restrictions on tax-deductible contributions for individuals at higher income levels, have changed. The limits apply to those who are covered by workplace retirement plans and have certain levels of modified adjusted gross income (MAGI).
For single individuals and those who qualify as the head of the household, the MAGI limits were between $59,000 and $69,000 in 2013, but will increase to between $60,000 and $70,000 for 2014. Anyone earning above those levels can still contribute to an IRA, but will not get a tax deduction. For married couples who file jointly, the phase-out range is between $96,000 and $116,000 for 2014, which represents an increase from a range of $95,000 to $115,000.
Roth IRA ranges for married couples increased to $181,000 and $191,000, up from $178,000 to $188,000 last year. However, there are a few rules to know regarding phase outs. According to the IRS:
"For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations.There are certain exceptions and savings contribution credits for lower income levels thatcan be found at the IRS website.
- Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more.
- Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more.
- Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more."
Healthcare
Below is an overview of changes to Medicare for 2014 compared to 2013:
| Costs at a Glance | 2013 | 2014 |
| Part B premium | Most people pay $104.90 each month. | Most people pay $104.90 each month. |
| Part B deductible | $147 per year | $147 per year |
| Part A premium | Most people don't pay a monthly premium for Part A. If you buy Part A, you'll pay up to $441 each month. | Most people don't pay a monthly premium for Part A. If you buy Part A, you'll pay up to $426 each month. |
| Part A hospital inpatient deductible | You pay: | You pay: |
| Days 1-60: $1,184 for each benefit period | $1,216 deductible for each benefit period Days 1-60: $0 coinsurance for each benefit period | |
| Days 61-90: $296 coinsurance per day of each benefit period | Days 61-90: $304 coinsurance per day of each benefit period | |
| Days 91 and beyond: $592 coinsurance per each "lifetime reserve day" after day 90 for each benefit period (up to 60 days over your lifetime) | Days 91 and beyond: $608 coinsurance per each "lifetime reserve day" after day 90 for each benefit period (up to 60 days over your lifetime) | |
| Beyond lifetime reserve days: all costs | Beyond lifetime reserve days: all costs |
In February, the White House rolled out MyRA for Americans who don’t have access to an employer-sponsored retirement savings plan. It cited data that 50% of all workers in the U.S. and 75% of part-time workers aren’t eligible for the retirement 401(k), 403(b), and related pension plans. It mentioned that to get a well-rounded retirement plan, employees utilize a mix of Social Security, individual savings plans and employer-provided pension schemes.
MyRA is intended to give those ineligible for traditional pension plans an opportunity to put away part of their paychecks into savings plans. The plan is still in the pilot stage and looks to be fully available toward the end of 2014. Another distinction is that contributions are to be invested in Treasury securities that, despite being safer and “backed by the full faith and credit of the United States,” don’t pay very high interest rates to really boost savings levels over the long haul.
The Bottom Line
One criticism of the MyRA initiative is that it includes savings plans and vehicles that are already available to workers. The confusion when it comes to retirement benefit changes might discourage employers and employees alike, but there are plenty of ways to take advantage of the available programs out there. Plus, the changes for the current year largely boost contribution and catch-up limits, though tax benefits have become more challenging for higher earners. Combined with the incentives and a recovering economy, however, those that prepare can be in great shape.
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Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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