Learn How Much You Can Put Into a Retirement Account
Find out What the Limits Are for the Current Tax Year
Is maxing out your retirement accounts one of your goals for this year? Are you curious about what the retirement contribution limits are for the current tax year? Do you need a primer on what retirement accounts are, and why they have contribution limits?
If you're good to go on retirement accounts, you can skip the “Background” section and go straight to the retirement contribution limits for 2016. If you're still a bit puzzled, read on to learn more about how you can save for retirement.
There are a handful of different accounts that help you save for retirement.
What's a 401k?
The most popular retirement account is the 401k account, which is offered by many employers. The money that you put in your 401k is called your “contribution.” This contribution is made with pre-tax money. This means that instead of paying income tax on your contribution now, you’ll pay taxes years down the road when you withdraw that money.
If you’re self-employed, and your business has no common-law employees other than your spouse, you can set up an Individual 401k for yourself. This is sometimes referred to as a Solo 401k. You have a choice of contributing either pre-tax dollars or after-tax dollars to your Solo 401k.
If you want to contribute after-tax dollars – meaning you pay taxes this year, but you don’t have to pay taxes when you withdraw the money in retirement – your account will be called a Roth Solo 401k or a Roth Individual 401k.
What's an IRA?
The Traditional IRA is funded with pre-tax dollars, while the Roth IRA is funded with after-tax money. (Here’s a helpful hint: anytime you hear the word “Roth,” it indicates “after-tax dollars.”)
You’re allowed to chip in a maximum of $5,500 per year (in the year 2016) to a combination of your Traditional IRA and Roth IRA accounts. If you’re 50 or over, you can chip in an extra $1,000 on top of that limit.
In other words, your yearly contribution to your Roth IRA plus your Traditional IRA can’t be greater than $5,500 if you’re 49 or under, or $6,500 if you’re 50 or over.
Some examples: Sally, age 25, contributes $5,500 to her Roth IRA. She is not allowed to contribute anything to her Traditional IRA in that same year.
John, age 57, contributes $2,500 to his Roth IRA and $4,000 to his Traditional IRA.
Benny, age 44, contributes $5,499 to his Roth IRA and $1 to his Traditional IRA.
You can establish both a Traditional IRA and Roth IRA account yourself. By contrast, only your employer can set up an SEP-IRA for you. SEP-IRAs are often used by those who are self-employed or small businesses.
Your employer can contribute up to 25 percent of your wages to an SEP-IRA – so if you are paid $80,000, your employer can contribute $20,000 to your SEP-IRA.
The SIMPLE IRA is also used by small businesses with 100 or fewer employees. Contributions to the SIMPLE IRA are made with pre-tax dollars.
2016 Contribution Limits
There are times the IRS decides to increase retirement contribution limits, although there hasn't been an enormous increase since last year. Here are the current limits so you can stay on track with your goals:
401k – $18,000
This applies to both Roth and Traditional 401k plans. It also applies to the 401k’s close cousins, called the 403b and the 457.
If you’re 50 or over, you can add an extra $6,000 to that maximum – for a total of $24,000 that you can stash away in a 401k.
SEP-IRA – $53,000
Just be cautious – you’re only allowed to contribute a maximum of 25 percent of your net profit, up to a maximum dollar amount of $53,000.
Traditional and Roth IRA, SIMPLE IRA – $5,500
You can only contribute $5,500 to a combination of your Traditional and Roth IRA, or $6,500 if you’re 50 or over. You can contribute $12,500 to a SIMPLE-IRA, or $15,500 if you’re 50 or over.