With the promise of a new year comes many things: resolutions, a chance to start over, and, of course, new tax legislation. The Treasury Department announced its inflation-adjusted limits for retirement account contributions, phase out limits, and available deductions for 2016, providing new guidance for Americans in the important retirement planning phases.
Despite hopes of expanded limits and additional savings possibilities, the IRS is not doing taxpayers any favors. With the cost of living index not rising enough to trigger limit increases, many thresholds will remain the same year over year.
Just as in 2015, the contribution limit for most employer-sponsored 401(k)s, 403(b)s, and 457 plans will remain flat at $18,000 per year. The pick-up contribution limits will also remain the same year over year; taxpayers who are 50 years old by December 31st, 2016 are still eligible to make an extra $6,000 contribution.
For those who are self-employed and maintaining solo retirement accounts, the contribution limit for 2016 will not change either; the limit maxes out at $53,000 between both employee and employer contributions. Contribution limits are based on a percentage of income with the compensation limit for these self-employed accounts remaining at $256,000.
SIMPLE, or Savings Incentive Match Plan for Employees, IRA holders looking for an increased limit will have to wait another year; 2016 contributions will remain the same as 2015 at $12,500. The catch-up limit for SIMPLE IRAs is also unchanging, remaining flat at $3,000.
Like the most other retirement accounts, defined benefit plan limits aren’t seeing any increases in 2016 either. These pension plans for high-income self-employed individuals don’t have any upsides to offer in the new year, with the annual benefit staying the same as 2015, at $210,000.
There are no surprises with traditional IRAs; in 2016, the contribution limit will be $5,500, the fourth year in a row with this cap. The catch-up limit will also stay at $1,000, making it a little harder for adults nearing retirement to build up an account balance.
In 2016, the income cap for deduction eligibility will increase slightly, but not substantially. While contributions to a traditional IRA can be made at any income level, deductions begin to phase out at a modified adjusted gross income of $61,000 for singles and those filing as head of household with a final cap of $70,000, and $98,000 for married couples with a final limit of $118,000.
One of the only parties who benefits in 2016 are those with IRAs who are not covered by retirement plans at work; the deduction phase-out limit is $1,000 higher, ranging between $184,000 and $194,000 for couples. This same limit also applies to Roth IRA contributions, again up slightly from 2015. While individuals over this limit cannot contribute to a Roth IRA, current legislation permits unlimited Roth IRA conversions, providing a compelling possibility for those who want tax-free growth and withdrawals upon retirement.
While there is always the potential for new possibilities with IRS announcements, 2016 is not the year. With many contribution limits remaining the same and phase-out limits improving only marginally, there are few possibilities for increased savings and deductions to be had. Taxpayers may need to wait until 2017 to see the increases they have been waiting for.