Some of the most popular retirement savings vehicles are 401(k)s and individual retirement accounts, which offer significant opportunities to build retirement savings as well as tax credits based on the amount you contribute to your savings. In order to maximize your savings, however, you need to be aware of the IRS contribution limits on each retirement account type.
Traditional IRAs and 401(k) accounts are funded with pre-tax income. The government's tax credits for contributing to these account types are designed to encourage people to save. IRS contribution limits represent limits on how much tax revenue the government is willing to forgo, not really on how much you can save, according to Michael Carignan, a certified financial planner and retirement planning counselor with HK Financial Services in Jacksonville, Fla.
What are the maximum 401(k) contribution limits for 2016?
IRS contribution limits on 401(k)s remain unchanged for 2016. The 401(k) elective deferral limit is $18,000. This limit pertains to the amount of pre-tax money a person can contribute to his 401(k), not including employer contributions or earnings on the existing funds in the 401(k) account.
Individuals who are over 50 years old and expect to hit the 401(k) elective deferral limit can contribute an additional sum of up to $6,000, which is the catch-up contribution limit.
Overall annual contribution limits set by the IRS for employer-maintained retirement accounts apply to elective deferrals, employer matching contributions, employer nonelective contributions and allocations of forfeitures. The overall limit is the lesser of the two following possible amounts:
- 100% of your compensation.
- $53,000 (or $59,000 including catch-up contributions).
The following chart shows how the IRS has adjusted retirement contribution limits over the last five years, such as to account for inflation.
401(k) plan IRS contribution limits
|401(k) elective deferrals||$16,500||$18,000|
|Annual defined contribution limit||$49,000||$53,000|
|Annual compensation limit||$245,000||$265,000|
|Catch-up contribution limit||$5,500||$6,000|
Small-business owners can choose to contribute up to $12,500 in a Savings Incentive Match Plan for Employees (SIMPLE) 401(k). The catch-up contribution limit for SIMPLE 401(k) plans is $3,000.
Retirement plans for government and tax-exempt entity employees
The 403(b) retirement plan is essentially the same kind of retirement account as the 401(k), except it is for employees of nonprofit and tax-exempt employers. The same limits for 401(k)s apply to 403(b)s and 457(b)s, which are a similar plan for employees of the government and certain tax-exempt entities.
What are the maximum IRA contribution limits for 2016?
In addition to 401(k) and similar plans, you can save for retirement using different types of IRAs. IRA contribution limits for 2016 are:
- $5,500 for people age 49 and younger.
- $6,500 for people age 50 and older.
These contribution limits apply to traditional IRAs and Roth IRAs, which have different rules regarding minimum distributions and taxable withdrawals. Additional contribution restrictions might apply to your Roth IRA depending on your modified adjusted gross income and tax filing status, however, according to the IRS.
Other IRA types
Eligible employees can contribute up to $12,500 to a SIMPLE IRA. The catch-up contribution limit for a SIMPLE IRA plan is $3,000. According to the IRS, contributions to SIMPLE IRAs count as elective deferrals subject to the overall IRS annual contribution limit.
Self-employed people can contribute to a SEP-IRA. The SEP-IRA contribution limit is the lesser of the two following amounts:
- 25% of your compensation.
How to calculate the saver's credit for your IRS tax return
The saver's credit is a tax credit designed to give people an incentive to save for retirement. According to the IRS website, you are eligible for the retirement savings contributions credit if you are:
- Age 18 or older.
- Not a full-time student.
- Not claimed as a dependent on someone else's tax return.
The amount of the credit depends on your AGI and tax filing status. The following chart shows how to calculate your credit.
|Filing Status||Amount of 2016 Saver's Credit|
|0% of contribution||10% of contribution||20% of contribution||50% of contribution|
|Married filing jointly||AGI: more than $61,500||AGI: $40,001-$61,500||AGI: $37,001-$40,000||AGI: not more than $37,000|
|Head of household||AGI: more than $46,125||AGI: $30,001-$46,125||AGI: $27,751-$30,000||AGI: not more than $27,750|
|All other filers||AGI: more than $30,750||AGI: $20,001-$30,750||AGI: $18,501-$20,000||AGI: not more than $18,500|
You have several retirement savings options that include tax benefits; however, you need to know the IRS limits on the different retirement account types in order to maximize your pre-tax savings and tax credits. If you are unsure of which retirement account or combination or retirement accounts to use, consider consulting a retirement planning professional who can help you create an effective savings strategy.
This article originally appeared at GoBankingRates.
Curious about 401(k)s and how to get one? Learn more about this valuable retirement savings tool.