We can all agree that investing in a 401K, IRA, or Roth, while being a scary proposition at times, is quite frankly the best use of our money for saving long term. Retirement might be a long way off for you, but it’s important to stay on top of the changes that take place for these accounts each year. They could shift your overall direction of planning for your financial future.
Here is a list of what will and won’t change for your 401K and IRA in 2016.
Before we look at what’s new, let’s look at what’s staying the same.
1. Contribution Limits
“No change” usually implies something good is happening because it’s consistent. In this case, no change for contribution limits means that you are limited to the same amount of money you could put away in 2015 for 2016. In 401K plans, that is $18,000 for people under the age of 50 — and in IRA and Roth plans, the contribution max will remain at $5,500 for those age 50 or younger.
This may not seem like a big deal, but over time the ability to put away less for your retirement means that you will need to earn more on your money that is already invested. According to Vanguard 401K data, only about 10% of participants put away the max every year. There’s no escaping the truth that the more you put away, the better off you are going to be in the long run.
2. 401K/IRA Combo
Many people believe that you can only have a 401K or an IRA, but not both. That simply isn’t true. In fact, having a separate IRA and a 401K can be a smart financial strategy. The downside of having both is that depending on your income, you may or may not be phased out of deducting your contributions to both plans.
In 2016, the income limitations will stay the same. If your adjusted gross income is between $61,000–$71,000 for single and head of household, or between $98,000–$118,000 for married couples, your deductible amount for contributions to your IRA will be phased out. If your income is lower, you will receive the full deduction. If your income is over those limits, you won’t be able to deduct any portion of your contributions.
And here are the details set to change — make sure you update your contributions to match.
3. Roth Income Threshold Limits Increase
Roth plans are very popular, especially with the Millennial demographic. They work in reverse of an IRA. Your contributions are made on an after-tax basis, but your distributions in retirement are tax-free. The objective is that you will be in a higher tax bracket when you retire, hence why you will ultimately save money on taxes that would’ve been due if you had an IRA. Roth plans have their own contribution income limits and are quite generous. In 2016, the contributions income threshold limits will increase by $1,000.
4. IRA for Non-Working Spouse
What about those spouses that don’t work, but still want to contribute to an IRA? In 2016, IRA income limits will increase for spouses without retirement accounts by $1,000.
If your spouse contributes to a retirement account at work, but you don’t work, you can set up your own IRA and contributions will be tax deductible up to $184,000 for couples filing jointly. Your contributions begin to phase out from $184,000–$194,000, and are completely phased out above that income level (meaning they wouldn’t be tax deductible). You can always still contribute up to the IRA contribution max, but you just wouldn’t receive the deduction.
5. Saver’s Credit
The saver’s credit is arguably one of the most overlooked tax credits. It rewards lower income individuals and families for saving for their retirement in any retirement plan. If you qualify for this credit, it is worth anywhere from 10%–50% of the contributed amount — up to $2,000 for individuals and $4,000 for couples. The credit is available to singles with an income under $30,750, and for couples, under $61,500.
Make sure your accountant is aware if you qualify for this credit so you can take advantage of this great benefit. Consider it the government’s matching program for your retirement contributions.