2016’s Changes for 401(k) and Retirement Plan Contribution Limits

Retirement planning requires sensible saving based on informed choices.  As legislative rules regarding 401(k), IRA and Roth IRA contribution limits are in constant flux, let’s look at some of the changes to expect in 2016, as well as some rules that will remain unchanged.

What will change in 2016

If a contributor is not covered by an employer-sponsored retirement plan but is married to someone who is covered by such a plan, the IRS will being phasing out the deduction for those contributions if the couple’s combined income is between $184,000 and $194,000.

 

This has changed from 2015’s limits, which were between $183,000 and $193,000. If a couple’s combined AGI is above $194,000, they do not qualify for a deduction.

 

Roth IRAs continue to provide tax advantages but only if the contributor falls below a certain Adjusted Gross Income (AGI).  These advantages begin to phase out as follows:

 

Table 1 - 2016 Limitations for Roth IRA deduction and phase out

 

Amount in which the deduction begins to be phased out

Amount at which the deduction ends

Married couples filing jointly

$184,000

$194,000

Singles and heads of household

$117,000

$132,000

 

 

Additional changes have been applied to the saver’s credit, otherwise known as the retirement savings contribution credit.  If a married couple is filing jointly with an AGI of $61,500 or less, they will qualify for the deduction.  The number is $46,125 for heads of household and $30,750 for individuals filing separately or single.

What isn’t changing in 2016

 

If there is no increase in the cost-of-living index – an increase required to meet the statutory thresholds to trigger adjustments to limitations – then several rules related to retirement contributions and limits remain unchanged.   The contribution limit for anyone who participates in an employer-sponsored 401(k), 403(b), and most 457 plans – as well as the Thrift Savings Plan – will be unchanged at $18,000 in 2016. Furthermore, if an employee is 50 years and over, the limit for catch-up contributions for any of these plans will be unchanged at $6,000.

 

The annual contribution limit to a traditional IRA will be unchanged in 2016 and remains at $5,500. The tax deductions granted for such contributions remain unchanged and are as follows:

 

Table 2 - 2016 Limitations for Traditional IRA deduction and phase out

 

Amount in which the deduction begins to be phased out

Amount at which the deduction ends

Married couples filing jointly*

$98,000

$118,000

Singles and heads of household

$61,000

$71,000

*Note, if the contributions are made by a married individual filing a separate return from his or her spouse, and that individual is covered by an employer-sponsored retirement plan, the phase-out begins at $0 and ends at $10,000.

 

©2015 Adams Keegan. This update is provided for informational purposes only. It is not intended as legal or investment advice. Readers should consult their own tax, legal and investment advisors before making any retirement plan decisions.