October is winding down, which should get you thinking about planning for next year’s budget. Tax planning is an important component of this. In fact the IRS recently announced information regarding changes in the 2016 limits for pension and 401K plan contributions. Since retirement contributions are a major part of many peoples budgets, the sooner you can figure out how those numbers look, the better off your finances will be.
The year to year change in the amount the government allows you to contribute to retirement accounts is tied to the cost of living index. Essentially, if the cost of living goes up significantly, the amount you can contribute to retirement accounts that may have tax benefits (such as pre-tax contributions to a 401K) also goes up. The logic is that if the cost of living is increasing, a person would need more money to maintain the same standard of living in retirement, thus they should be allowed to increase their retirement account contributions.
The IRS typically makes some changes to retirement contribution regulations every year. Most contribution limits in 2016 will be the same as in 2015. So, here are highlights of the things that will stay the same:
- The maximum amount an employee can contribute to his/her 401K plan remains unchanged at $18,000.
- In general, persons over 50 years old are able to contribute an additional amount to their 401K plans as a “catch up” contribution. For 2016, this amount remains unchanged at $6,000.
- The yearly limit on contributions to an Individual Retirement Account remains the same at $5,500.
- People over 50 years old are able to contribute an additional amount to their IRA as a “catch up” contribution. This “catch up” maximum remains at $1,000 as it is not affected by the cost of living index.
Some IRS rules did change in 2016. Contributions to IRAs are tax deductible as an incentive for individuals and families to save for their futures. However, IRS regulations say the amount that can be claimed as a tax deduction is phased out as a person’s income increases. This is impacted by the cost of living index. For 2016 the cost of living index did rise enough to trigger some slight increases in some of these phase out ranges. Here are the main points:
- If a person contributing to an IRA is NOT covered by a workplace retirement plan, but is married to someone who IS covered, the IRA contribution limit is phased out if the couple’s combined income ranges between $184K and $194K (up from $183K and $193K).
- The deduction phase-out for couples filing jointly making contributions to Roth IRAs increases to $184K to $194K (from $183K to $193K). For singles and heads of households the phase-out increases to $117K to $132K (up from $116 to $131K).
Readers should note that the amount you can contribute to a 401K or Roth IRA did not change. Instead only the income ranges to fully phase-out tax deductible retirement account contributions have changed. This may seem dry, but it could affect your return for the 2016 tax year. All in all the rules pertaining to retirement account contribution and tax deductible phase-out ranges for the 2016 tax year were limited. For complete information on what values changed or did not change, please reference the IRS’s official website.
Finally, most personal finance experts advocate making use of tax sheltered investment account such as 401Ks, IRAs or Roth IRA’s. So, if you have not already done so, consider maximizing your contributions through these tax sheltered options. If you want to learn more about how to manage your taxes consider checking our other tax articles and retirement.