Social Security, Medicare and retirement accounts will all change in modest but important ways in 2014. And for the first time, retirees too young to qualify for Medicare will be guaranteed the right to buy private insurance via their state's health insurance marketplace. Here's what to expect for your retirement benefits next year:
Obamacare for early retirees. People who retire before age 65 will now have the option to buy a health plan through their state's health insurance marketplace. "People can no longer be charged more because of their health status or health history," says Karen Pollitz, a senior fellow at the Kaiser Family Foundation. "If you are offered the choice of retiree health benefits, you can compare that cost to what is offered on the exchange and pick the plan that is the better deal for you." If your household income is less than $45,960 ($62,040 for couples) in 2014, you may additionally qualify for a premium subsidy.
Slightly better Medicare Part D prescription drug coverage. Medicare Part D plans have a coverage gap that begins once a retiree has spent $2,850 on medications in 2014 and ends when catastrophic coverage kicks in after $4,550 of medication costs. The amount retirees must pay for their generic drugs in the coverage gap will decrease from 79 percent of the medication's cost in 2013 to 72 percent in 2014. "The Affordable Care Act is closing this coverage gap by gradually reducing beneficiary cost sharing," says Juliette Cubanski, associate director of the Program on Medicare Policy at the Kaiser Family Foundation. The cost-sharing requirement for brand-name drugs in the coverage gap will remain 47.5 percent of the drug's cost in 2014.
Bigger Social Security payments. Social Security beneficiaries will get 1.5 percent bigger checks in 2014. This cost-of-living adjustment is expected to increase the average monthly Social Security benefit by $19 for individuals and $31 for couples who are both receiving benefits. "The monthly payments are calculated to keep pace with inflation, and that protection is designed to last through until your death," says Brent Neiser, a certified financial planner and a senior director at the National Endowment for Financial Education in Denver. "If you claim before your full retirement age, you have discounted the power of that inflation-adjusted payment, and that also lasts for a lifetime."
Higher Social Security taxes for some. Workers typically pay 6.2 percent of their earnings into the Social Security system until they reach the taxable maximum amount of earnings. This tax cap will increase from $113,700 in 2013 to $117,000 in 2014. About 6 percent of the 165 million people who pay into Social Security are expected to pay higher Social Security taxes due to the increase in the tax cap. People who earn more than the tax cap do not have to pay Social Security taxes on income above the threshold or have that income factored into their retirement benefit. "The Silicon Valley and San Francisco areas, where you have very wealthy people, are among the places where people are paying the least into Social Security," says Richard Johnson, a senior fellow and director of the program on retirement policy at the Urban Institute, a nonpartisan research firm. "If they are making several million, the share that is subject to the Social Security tax is really quite small."
Larger IRA income limits. Contribution limits for 401(k)s and individual retirement accounts will remain the same next year, but the income limits for those who are eligible to contribute to IRAs will increase. The tax deduction for traditional IRA contributions is phased out for investors with workplace retirement plans who also want to save for retirement in an IRA. Investors who have 401(k)s at work can claim an additional tax deduction for their IRA contributions until their modified adjusted gross income is between $60,000 and $70,000, $1,000 more than in 2013. The income limits for married couples will grow by the same amount to between $96,000 and $116,000. The income phaseout range is between $181,000 and $191,000 for investors who don't have a workplace retirement plan but are married to someone who does, up $3,000 from 2013.
Higher Roth IRA income cutoffs. The AGI phase-out range for Roth IRAs will climb by $2,000 ($3,000 for couples) in 2014 to between $114,000 and $129,000 for singles and heads of household and $181,000 to $191,000 for married couples. However, people who earn above these limits can convert traditional IRA assets to a Roth.
Better access to the saver's credit. Retirement savers with slightly higher incomes will be eligible for the saver's tax credit in 2014, which can be worth as much as $1,000 for individuals and $2,000 for married couples who contribute to retirement accounts including 401(k)s and IRAs. The income limit will increase by $1,000 to $60,000 in 2014 for married couples filing jointly. Individuals earning up to $30,000 and heads of household earning up to $45,000 in 2014 may also qualify for the credit, up $500 and $750, respectively, from 2013. The saver's credit can be used to increase a taxpayer's refund or reduce the tax owed, and can be claimed in addition to the tax deduction for traditional 401(k) and IRA contributions. Saver's credits were claimed on nearly 6.4 million income tax returns in tax year 2011, but most of the credits were small, averaging $215 for joint filers, $166 for heads of household and $128 for single filers.