It’s been a while since we’ve talked specific numbers, so I thought I would provide a summary of the contribution limits for 2016 that seem to be most relevant to my readers.
Simply put, while you can save as much money as you want on an after-tax basis into a standard investment account, the government puts limits on how much you can save in retirement vehicles. They don’t want you to avoid paying too many taxes for too long!
Disclaimer: Your circumstances may be unique, complicated, or different, so you should double check these limits and your specific plan(s), account(s), and situation before contributing.
401(k), 403(b), and Thrift Savings Plan (TSP) Contributions
If you’re fortunate enough to have an employer sponsored 401(k), 403(b), or TSP plan and are eligible to participate, you can contribute $18,000 in 2016. (I recommend doing so on a pre-tax basis.) If you are age 50 or older (based on your age as of the last day of the calendar year – 31 December 2016, in this case) you can contribute an extra $6,000 for a total of $24,000 in 2016.
These contributions must be made within the calendar year.
Traditional and Roth Individual Retirement Arrangement (IRA) Contributions
You need earned income to be able to contribute to both Traditional and Roth IRAs. The 2016 combined contribution limit is $5,500, with a $1,000 catch-up contribution available if you are age 50 or older. This means if you have multiple Traditional and/or Roth IRA accounts, you can only contribute $5,500 total among all the various accounts (or $6,500 if you are age 50 or older as of the end of the calendar year).
If you are currently making more than $5,500 (or $6,500 if applicable) you should satisfy the earned income requirement.
Note that for the most part anyone can then contribute to a traditional IRA. However, you can only deduct your entire contribution (assuming you contribute pre-tax dollars) if you are a single filing taxpayer and have modified adjusted gross income (MAGI) of less than $61,000. If you are married and file jointly the important number to note is MAGI of less than $98,000 – if you both are covered by an employer sponsored retirement plan. Above this, and you need to check. If only one of you is covered by an employer sponsored retirement plan, the important number is $184,000. (For all of these, there are phase-out ranges; once outside of the range you cannot deduct any portion of your contribution.)
For Roth IRAs, you can never deduct your contributions because they are made with after-tax dollars. Here, the important note is that once you make enough money you are no longer eligible to contribute. If you are a single filing taxpayer you need to start paying attention when your MAGI hits $117,000 and then $184,000 if you are married and file jointly.
The simplest way to think about these numbers, especially because you will only know your modified adjusted gross income after you file your taxes, is to start paying attention when your total income is getting close.
Bonus for IRAs: As long as the account was opened by December 31st of the prior year, you can contribute for that year until April 15th of the current year (your tax due date). This means that if you have IRAs, which you opened prior to 2016, but have not yet contributed for 2015, you still can (as long as it’s by April 15, 2016)!
Also note that your taxpayer filing status (single, married filing jointly, head of household, etc.) is based on your filing status as of the last day of your tax year (December 31st for most us).
Some of this probably feels more complicated than we all would like. If you’re on the cusp with any of these limits, I recommend getting specific and making sure you KNOW what applies to you. And let me know if I can help!