If you have active retirement plans, it would be a good idea to assess them regularly. There are ways you can maximize retirement accounts in 2016 so that your retirement savings get boosted significantly. Let’s see how you can take full advantage of Self Directed IRA, 401K plans and individual retirement account perks that you’re eligible for this year.
Maxing Out your Self-Directed 401(k)
If you save $1,500 per month, you can max-out your 401(k) completely. Anyone in the 25 percent tax bracket who maxes out the full amount into a 401(k) will save $4,500 on the federal income tax bill. Those in the 35 percent tax bracket will save $6,300 on the same contribution. No income tax will be due on this money till you withdraw it from the account. In case you fall into a lower tax bracket in retirement, you will pay a lower rate on the distributions.
Making Catch-Up Contributions
Individuals who are 50 and older can contribute an additional $6,000 to a 401(k) plan in 2016, for a total contribution of $24,000. To achieve this 401(k) limit, you need to contribute $2,000 a month. It will reduce your tax bill by $6,000 if you are in the 25 percent tax bracket and $8,400 if you pay a 35 percent federal income tax rate.
Getting an Employer Match
If it’s not possible for you to take full advantage of the 401(k) tax deduction, you can try saving enough to claim the matching funds that your employer offers. For example, if your company provides a 401(k) match up to 6 percent of the pay, then you should set up withholding for that amount. Consider the match as FREE money to you. So if you put aside 6% and your company matches 6% – that means you are saving 12% towards retirement. This puts you further ahead than most! There are companies who automatically enroll employees in the plan at 3 percent of the pay. The employees will then have to adjust their withholding rates to take full advantage of the match.
Taking Advantage of IRAs
You can hold off income tax on $5,500 that you contribute to IRA, in addition to saving in 401(k). Those who are 50 and older can contribute an additional amount of $1,000 for a total of $6,500. You can’t claim a full tax deduction for an IRA contribution if the modified adjusted gross income is $61,000 and $71,000 in case of individuals, and $98,000 to $118,000 for married couples, or any kind of deduction if your income tops these amounts. If your spouse has a retirement account, then the tax deduction for IRA contributions is phased out for couples earning between $184,000 and $194,000 in 2016.
Considering a Roth IRA
It would be a good idea to let your Roth IRA grow in value-tax-free so that you can use the money later on in life. Investment earnings in Roth IRA account aren’t taxed and withdrawals are tax-free till the age of 59½. Roth IRA eligibility phases out for taxpayers whose adjusted gross income is between $117,000 and $132,000 for individuals and $184,000 to $194,000 for married couples.
By Claiming the Saver’s Credit
You might be able to claim the saver’s credit if you save in a retirement account, with an adjusted gross income of less than $30,750 for individuals, $46,125 for heads of household and $61,500 for married couples. Additionally, you can add a tax credit worth between 10-50% of the retirement account deposit for contributions of up to $2,000 and $4,000 for couples.
Always seek professional advice before taking such important financial decisions.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.