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Few New Treats Found in 2016 IRA Contribution Limits

Money on a scale

  |  By Taylor Close

The IRS typically releases its updated IRA contribution limits around Halloween, and it’s always an open question as to whether the announcement will contain any treats for retirement savers – like an increase in IRA contribution limits for the upcoming year.

The IRS hasn’t raised IRA contribution limits since 2013 and, unfortunately, that streak won’t be broken in 2016. As inflation remains persistently low, the IRS said cost-of-living thresholds that would trigger an increase in contribution limits for traditional and Roth IRAs in 2016 were not met.

That means the traditional and Roth IRA contribution limits remain static at $5,500 in 2016, with an additional $1,000 catch-up contribution for investors who are 50 and older.

Here are the slight changes the IRS did announce for 2016:

  • One group of savers who will get an adjustment in 2016 is IRA contributors who are not covered by a workplace retirement plan and are married to someone who is covered. For this group, the deduction is phased out if the couple’s income is between $184,000 and $194,000 in 2016, which is up from $183,000 and $193,000 in 2015. 
  • The adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA has been raised to $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015. For singles and heads of household, the income phase-out range is $117,000 to $132,000 for 2016, up from $116,000 to $131,000 this year.
  • The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.

To get a full list of IRA contribution limits for 2015 and 2016, you can visit PENSCO’s IRA contribution limits and deadlines page.

While IRA contributions limits may not be changing in 2016, it is still crucial for investors to take an active interest in their retirement strategy. In August, I wrote on the PENSCO blog that one of the biggest mistakes that people make with their IRA is not making an annual contribution.

That’s because holdings in a traditional IRA can compound year after year on a tax-deferred basis and can grow that way until required minimum distributions must start when an account holder turns 70½. Look at the growth trajectory of $100,000 invested in a tax-deferred account where the account holder makes annual contributions of $5,500.

As the chart demonstrates, there is no question that an IRA, supplemented with annual contributions, can be a powerful way to save for retirement. As someone who has spent her career in financial services and now works at PENSCO, where we custody alternative assets in retirement accounts, I have seen the ability of small IRA contributions to grow into large nest eggs.

While the 2016 IRA contribution limit guidelines issued by the IRS may not contain new treats, making annual IRA contributions is an easy trick you can use to prepare yourself for a successful retirement.