Every year, the federal government reviews the rules for Individual Retirement Accounts and makes adjustments. They’ve made a few changes for IRAs that will go into effect in 2016. While the changes haven’t been major, they could still impact your savings strategy for the next year.
Here’s what to expect for 2016.
No increase in IRA contribution limits
The amount you can contribute to your IRA will stay the same in 2016. You will be able to contribute up to $5,500 if you are younger than 50 and up to $6,500 a year if you are 50 or older. The fact that there is no increase will be frustrating to people who are currently maxing out their accounts. This is roughly 43% of IRA investors, according to research from the Employee Benefit Research Institute
If you’re worried about hitting the limit next year, make sure to get your full contribution in for 2015. Remember, you can make IRA contributions for 2015 up until April 15th, 2016 so this is a chance to get more money in your tax-advantaged account. Keep this in mind if you get a tax refund.
Higher income limit for Roth IRAs
The government did increase the income limit for allowing people to contribute to a Roth IRA. If your annual income is past a certain amount, the amount you can contribute to a Roth IRA decreases until you reach a point where you can’t add any money to the Roth IRA. The government has increased the entire threshold by $1,000 which should make a few more people eligible to contribute to Roth IRAs.
If you are single, Roth IRA contributions start phasing out when your adjusted gross income is $117,000 a year and you can no longer contribute if you make over $132,000 a year. For married couples, contributions begin phasing out when your combined adjusted gross income is $184,000 and you can no longer contribute to a Roth IRA when you make over $194,000.
No income limit increase for Traditional IRAs
While the income limit was increased for Roth IRAs, it will remain the same for Traditional IRAs in 2016. This income limit applies only if you have a retirement plan at work. If you have no other retirement plan, you can contribute to a Traditional IRA and receive the full tax deduction for your contributions no matter how much you earn.
If you are single and have a work retirement plan, your Traditional IRA deduction starts phasing out when your adjusted gross income is $61,000 and you can no longer receive a tax deduction for your contributions if you make over $71,000. If you are married, your contribution deduction starts phasing out when your combined adjusted gross income is $98,000 and phases out completely when you earn over $118,000. These are the same limits as 2015. If you have a work retirement plan and earn more than the income limit, you can still contribute to a Traditional IRA. You just won’t receive a tax deduction for your contributions.
Higher income limit for spousal Traditional IRAs
One other change is the income limit for spousal contributions into a Traditional IRA. This is when one person isn’t working but their spouse is and has a retirement plan at work. The non-working spouse receives a deduction for their Traditional IRA contributions only if their combined adjusted gross income is below a certain limit.
This income limit has also been increased by $1,000 for 2016. Spouses will receive the full Traditional IRA deduction until their combined adjusted gross income equals $184,000. From there, their deduction starts phasing out until it ends at $194,000. Once again, this is just a small increase but should help a few more Americans receive a tax benefit for their retirement plans.
As you can see, it’s worth checking in on the new IRA rules every year. While there are rarely huge changes, there’s always the chance that one of these adjustments can impact your financial plan.
