October is drawing to a close, which gets me to thinking about next yearâ€™s budget. The start of 2016 may be over two months away, but Iâ€™ve already received a note from my employer saying that medical coverage information will be released for review and enrollment soon. Also, the IRS announced information regarding the 2016 limits for pension and 401K plan contributions. Medical coverage and how much one can contribute towards retirement are two items that can definitely affect a budget. The sooner I can figure out what those numbers look like and how it will affect my familyâ€™s finances the better.
The change year to year in the amounts the government allows us to contribute to retirement accounts is based upon the cost of living index. Basically, if the cost of living goes up significantly, the amount Americans are allowed to contribute to retirement accounts that may have tax benefits (such as pre-tax contributions to a 401K) also goes up. The logic is that if the cost of living is increasing, a person would need more money to maintain the same standard of living in retirement, thus they should increase how much they contribute to their retirement accounts.
In 2015, the cost of living index did not rise enough to trigger changes in the contribution maximums for most retirement accounts. Here are highlights of the most commonly applicable amounts:
- The maximum amount employees can contribute to their 401K plans remains unchanged at $18,000.
- Those over 50 years old are able to contribute an additional amount to their 401K plans as a â€œcatch upâ€ contribution. For 2016, this amount remains unchanged at $6,000.
- The annual limit on contributions to an Individual Retirement Account remains unchanged at $5,500
- Those over 50 years old are able to contribute an additional amount to their IRA as a â€œcatch upâ€ contribution. This amount is not affected by the cost of living index, and remains at $1,000.
Contributions to IRAs are tax deductible as an incentive for individuals and families to invest in their future. However, the amount that can be claimed as a tax deduction is phased out as a person, or couple’s income increases. The cost of living index did rise enough to trigger some slight increases in some of these phase out ranges. Here are the highlights:
- If a person contributes to an IRA who is NOT covered by a workplace retirement plan, but is married to someone who IS, the deduction to the IRA is phased out if the couple’s combined income is between $184K and $194K (up from $183K and $193K).
- The deduction phase-out for couples filing jointly making contributions to Roth IRAs increases to $184K to $194K (up from $183K to $193K). For singles and heads of households the phase-out increases to $117K to 132K (up from $116 to $131K).
While the contribution maximums did not change, the income ranges to fully phase-out retirement account contribution tax deductions did. This could affect your return for the 2016 tax year. These are only a few highlights pertaining to retirement account contribution and tax deductible phase-out ranges for the 2016 tax year. For complete information on what values changed or did not change, please reference the IRS’s official website.
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