IRS announces 2016 retirement plan contribution limits

The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2016, and there are a few minor tweaks to income phase-outs for certain IRA contributors and to the adjusted gross income limits for snagging the saver’s credit. But the real message this year: there’s no extra room for savings for wage and salary types and the self-employed.

Déjà vu. That’s what happened for 2014, when pension contribution limits stayed the same as in 2013. Last year we saw small increases in the maximum amounts you could save for 2015, and those increases are carried over for 2016. What’s to blame? The cost-of-living index did not meet the legal thresholds that trigger increases. Yet with inflation lurking and retirement savings falling short, workers and their spouses should eke out every last opportunity for tax-advantaged savings. If you’re 50 or older you can stuff $24,000 as employee deferrals into a 401(k), for example. Here are the details.

401(k)s. The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, is $18,000 for 2016, the same as in 2015.

The 401(k) Catch-Up. The catch-up contribution limit for employees age 50 or older in these plans also stays the same at $6,000 for 2016. Even if you don’t turn 50 until Dec. 31, 2016, you can make the additional $6,000 catch-up contribution for the year. If your plan lets you, you might want to frontload your catch-up contributions.

SEP IRAs and Solo 401(k)s. For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) remains at $53,000 for 2016. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation is still $265,000. For more on savings strategies if you have self-employment income, see How Entrepreneurs Can Get Big Tax Breaks For Retirement Savings.

The SIMPLE. The limit on SIMPLE retirement accounts for 2016 is $12,500 for 2016, the same as in 2015. The SIMPLE catch-up limit is still $3,000. For more on how a SIMPLE works, see A Simple Way To Save For Retirement.

Defined Benefit Plans. The limitation on the annual benefit of a defined benefit plan remains unchanged at $210,000 for 2016. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.

Individual Retirement Accounts. The $5,500 limit on annual contributions to an Individual Retirement Account remains the same for 2015, the fourth year in a row. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000. (Remember that 2015 IRA contributions can be made until April 15th, 2016.)

Deductible IRA phase-outs. You can earn a little more in 2015 and get to deduct your contributions to a traditional pre-tax IRA. Note, even if you earn too much to get a deduction for contributing to an IRA, you can still contribute; it’s just non-deductible.

In 2016, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000.

Here’s a group who get one of the few 2016 adjustments. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000 in 2016, up from $183,000 and $193,000 in 2015.  For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA Phase-Outs. The same adjustment helps Roth IRA savers. In 2016, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015.  For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000 in 2015.

If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions. To learn more about the backdoor Roth, see How A High-Earner Couple Got A Roth IRA And You Can Too.

The Saver’s Credit. This is the last change for 2016. The new AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000 in 2015; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.

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