Retirement Plan Contribution Limits Unchanged for 2016
The Internal Revenue Service (IRS) provided some expected but unwelcome news recently regarding the amount of money that investors can save toward retirement. Due to insufficient inflation, no cost-of-living adjustments will be made affecting dollar limitations for retirement savings accounts for 2016.
Employer Sponsored Plans
For those individuals who have access to employer sponsored retirement plans, contributions limits will remain the same. For 401(k), 403(b), and most 457 plans, limits are $18,000, and the allowable catch-up contribution for employees age 50 or older is $6,000. For SIMPLE 401(k) or SIMPLE IRA accounts, limits remain $12,500, along with catch-up contributions of $3,000.
Plan Limits for Year 2016 2015
401(k) Elective Deferrals $ 18,000 $ 18,000
403(b) Elective Deferrals $ 18,000 $ 18,000
457 Elective Deferrals $ 18,000 $ 18,000
401(k), 403(b), 457 Catch-Up $ 6,000 $ 6,000
SIMPLE IRA/401(k) Elective Deferrals $ 12,500 $ 12,500
SIMPLE IRA/401(k) Catch-Up $ 3,000 $ 3,000
*Contributions can be made up to the contribution limits or 100% of compensation, whichever is less.
Total contributions into a defined contribution plan (factoring in both employee and employer contributions) cannot exceed $53,000. Total annual compensation that can be considered for retirement plan purposes is $265,000.
IRAs & Roth IRAs
In a similar fashion, contribution limits were not increased for traditional IRAs and Roth IRAs, marking the second straight year without an adjustment. Maximum contributions will remain at $5,500 with an additional catch-up contribution of $1,000 for investors age 50 or older.
Although the contribution limits were not increased, the income thresholds that determine whether you can contribute and how much is tax deductible will see some changes.
For Roth IRAs, income limits were increased by $1,000. Individuals with MAGI below $117,000 can make the full contribution, while those with MAGI between $117,000 and $132,000 can contribute a reduced amount. For taxpayers who are married filing jointly, a full contribution can be made with MAGI below $184,000 with a reduced contribution for those between $184,000 and $194,000.
Remaining unchanged, tax deductibility of traditional IRA contributions is phased out for taxpayers who have an employer sponsored plan and a modified adjusted gross income (MAGI) between $61,000 and $71,000 for individuals and $98,000 to $118,000 for couples married filing jointly.
What did change for traditional IRAs is that the income limitations for unemployed individuals whose spouses are covered by employer-sponsored plans increased by $1,000. The tax deduction in this case will now be phased out for couples earning between $184,000 and $194,000 in 2016.
What Should You Do?
Make the most of your retirement savings by maximizing your contributions. If you are not yet hitting the thresholds listed above, it is worth considering increasing your contribution rate. Doing so will help you towards your goal of retirement readiness and can also potentially reduce your tax liability. Make 2016 your best savings year yet!