As 2016 rapidly approaches us, it’s important that you know the rules about changes upcoming for 401(k)’s and IRA’s so you get off to a great start in 2016. People often overlook funding an IRA because they don’t how the qualifications work within their family. Whether you are a few years from retirement or you are just beginning your savings plan, keep this handy article by your side so you make the most of your retirement contributions for 2016.
- How Much Can I Contribute?
The good news is that 2016 brings a calendar year where nothing really changes in terms of your overall maximum contributions for 401(k)’s and IRA’s. For 401(k)/403(b) investors, if you are under 50 years old you can put away up to $18,000, and those that turn the age of 50 in 2016 or are older than 50 can make a ‘catch up’ contribution of $6,000 (the maximum being $24,000 overall). For IRA/Roth IRA investors, if you are under 50 the maximum you can put away is $5,500 and those turning 50 or older can make a catch up contribution of $1,000 to the overall limit of $6,500. For 401(k) investors, consider carefully whether to do the pre-tax plan at work or the roth plan at work.
- The Roth IRA Threshold Limits Increase!
Many investors believe if they max out their 401(k) plan at work or even participate, that this will disallow them from contributing to a Roth IRA. Nothing could be further from the truth! For single filers in 2016, the income threshold starts at $117,000 AGI and ends at $132,000. For married filers, the income threshold starts at $184,000 and ends at $194,000. This can be pretty significant for your family if you really do the math on where your income falls and whether or not you can make a full or partial contribution.
- The Spousal IRA
Many families do not understand that even a spouse who is non working can potentially contribute to an IRA account. Even if your working spouse participates to a retirement plan in the work place, your spouse can set up an IRA account and it could still be tax-deductible for your family. For married couples who earn less than $184,000 AGI, this could be an excellent retirement and tax savings option. Once your family hits the mark of $194,000 AGI, then the deductibility of the plan would be phased out although you can still contribute to the IRA.
- Lower Income Families Should Really Be Aware Of The Savers Credit
This tax credit I have found over the years is one of the most underutilized credits. Although saving money into retirement accounts can be challenging for lower income families, the credit you can qualify for here could be worth anywhere from 10% to 50% of the amount you contribute to your plan. This credit could be worth as much a $2,000 for individuals and $4,000 for couples. For married couples, your AGI will need to be below $61,500 and individuals under $30,750 AGI.
- Don’t Forget The Kids
Remember, to be able to make an IRA contribution, you must have earned income. Earned income includes the following:
- Wages, salaries and tips
- Union strike benefits
- Long-term disability benefits received prior to minimum retirement age
- Net earnings from self-employment
If you own a business or your child has a part time job with w-2 income, this will give you a great opportunity to set up a Roth IRA or Traditional IRA while they are young. Think about the compounding of these assets over 40 or 50 years!
Use these five your smart money moves tips to help you maximize your 401(k) or IRA strategy for 2016!
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.