IRS Sets 401(k) Contribution Limits for 2016
On October 21, 2015, the Internal Revenue service announced cost-of-living adjustments which affect dollar limitations for pension plans and other retirement related items for tax year 2016. What has changed? Not much! The IRS determined that pension plan limitations will not change in 2016 because the cost of living index did not meet the required thresholds to trigger any adjustments. Here is a summary of the limits for 2016:
- For 401(k), 403(b), and most 457 plans, the elective deferral (contribution) limit remains unchanged at $18,000 for 2016. The catch up contribution limit for employees aged 50 and over who participate in these plans remains at $6,000 for 2016.
- For IRA’s, the limit on annual contributions remains unchanged at $5,500 for 2016. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000 for 2016.
- For simplified employee pension (SEP) IRA’s and individual/solo 401(k)s, elective deferrals remains unchanged at $53,000 in 2016, based on annual compensation limits of $265,000. The minimum compensation that may be required for participation in a SEP remains unchanged at $600 for 2016.
- For savings incentive match plan for employees (SIMPLE) IRAs, the contribution limit remains unchanged at $12,500.00 for 2016. The catch-up limit remains at $3,000.
In addition to these contribution limit announcements, the IRS announced that the taxable wage base will remain at $118,500 for 2016. This means that an employee will pay Social Security (FICA) tax on all wages earned up to $118,500; any wages earned above that limit will not be subject to FICA withholding.
Although the contribution maximums remain unchanged for 2016, most employees do not meet the maximum contribution rate. The beginning of a new year is always a good time to evaluate your retirement plan contributions and determine if increasing (or decreasing) your contribution rate makes sense for you. It is also a good time to check the beneficiary designations on these accounts to ensure that they are up-to-date. If you have married, divorced, or had children during the year, those beneficiary designations may need to be adjusted. Although it may feel as if retirement is a long ways off, it is never too early to start planning for your future!