How 401(k)s and IRAs Will (and Won't) Change in 2016
You won't be able to save more in a 401(k) or individual retirement account in 2016. However, you can earn slightly more and still be eligible to contribute to a Roth IRA and claim the saver's credit. Here are the ways your retirement accounts will change in 2016.
401(k) contribution limits unchanged. The contribution limit for 401(k)s, 403(b)s, most 457 plans and the federal government's Thrift Savings Plan will remain $18,000 in 2016. The catch-up contribution limit for workers age 50 and older will also stay the same at $6,000. "The pension plan limitations will not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment," according to a statement from the IRS. Most savers don't come anywhere near the 401(k) contribution limits. Only about 10 percent of 401(k) participants contribute the maximum possible amount each year, according to Vanguard 401(k) plan data.
IRA contribution limits stagnant. The IRA contribution limit will continue to be $5,500 in 2016. Workers age 50 and older can make catch-up contributions of an additional $1,000. Many retirement savers max out their IRA each year. Some 43 percent of IRA investors contributed the maximum possible amount in 2013, according to an Employee Benefit Research Institute analysis of IRAs.
Bigger Roth IRA income cutoffs. Workers can earn $1,000 more in 2016 and still be eligible to contribute to a Roth IRA. Eligibility to make Roth IRA contributions phases out for taxpayers whose adjusted gross income is between $117,000 and $132,000 for individuals and heads of household and $184,000 to $194,000 for married couples. "This will make a few more folks eligible for the Roth," says Kevin Brosious, a certified financial planner and president of Wealth Management Inc. in Allentown, Pennsylvania. However, there are a couple of ways you can contribute to a Roth IRA even if your income is above the cutoff amounts. "A backdoor Roth is where you contribute into a nondeductible IRA and then convert it to a Roth IRA," Brosious says. "Also, the IRS now allows after-tax contributions made to a 401(k) to be converted into a Roth IRA."
Traditional IRA income cutoffs remain the same. Savers who have a workplace retirement account can additionally claim a tax deduction for IRA contributions, unless their income exceeds certain annual limits. The IRA tax deduction is phased out for singles and heads of household whose modified adjusted gross income is between $61,000 and $71,000, the same as in 2015. The income phaseout range is $98,000 to $118,000 for married couples when the spouse who contributes to the IRA also has access to a workplace retirement plan. There are no income limits for the IRA tax deduction for people who don't have a retirement account at work.
IRA income limits increase for spouses without retirement accounts. Savers who don't have a workplace retirement account but are married to someone who does can claim the full tax deduction on their IRA contribution until the couple's income exceeds $184,000, which is $1,000 more than in 2015. The IRA tax deduction for spouses without retirement accounts is gradually phased out for couples earning between $184,000 and $194,000 in 2016.
Higher income limit for the saver's credit. Workers with slightly higher incomes will qualify for the saver's credit in 2016. Single retirement savers are eligible for the credit until their adjusted gross income exceeds $30,750, which is $250 higher than in 2015. The income limit for married couples will climb by $500 to $61,500. And heads of household qualify for the credit if their income is $46,125 or less, up from $45,750 in 2015.
This tax credit for people who save for retirement isn't well known, with only 30 percent of workers saying they are aware of the saver's credit, according to a survey of 4,550 workers by Harris Poll for the Transamerica Center for Retirement Studies. For people who qualify, the saver's credit is worth between 10 and 50 percent of the amount contributed to a retirement account up to $2,000 for individuals and $4,000 for couples, with the biggest credits going to people with the lowest incomes. "Now, even more low- and moderate-income American workers can benefit from this valuable tax incentive to save for retirement," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. "The saver's credit literally pays workers to save for retirement. It's a free matching contribution from the IRS."
Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at firstname.lastname@example.org.