2 Changes to IRAs in 2016: Do They Affect You?

The IRA changes this year are small, but they could mean a lot if you're affected. Image: author.

IRAs are a great way to gain tax-advantaged savings, whether it's with a Roth IRA, or a traditional IRA. Here's a brief look at the benefits of different kinds of IRAs, as well as some changes to be aware of in 2016.

What IRAs offer

Individual retirement arrangements, in short, offer a handful of tax benefits on the contributions to IRAs, as well as the growth of those contributions over time. There are two kinds of IRAs: the traditional IRA, and the Roth IRA. Here are the things they have in common:

  • Savers can contribute up to $5,500 per year to either a Roth or traditional IRA.
  • If you're 50 or over, you can contribute an extra $1,000 in "catch-up" contributions.
  • Those contributions grow tax-free once the money is inside the IRA.
  • You can make contributions for 2015 as late as April 15, 2016 (tax day).

Here's how the Roth and traditional IRA differ:

  • Contributions to a traditional IRA may be deductible from your current-year income if your employer doesn't offer a retirement plan.
  • Contributions to a Roth IRA are never tax-deductible from your current-year income.
  • Contributions to a Roth IRA may be limited, depending on your current-year taxable income.
  • Contributions to a Roth IRA may be made up to the full $5,500 limit, with no income limits.
  • Distributions in retirement from a traditional IRA are taxed at your nominal income tax rate.
  • Distributions in retirement from a Roth IRA are completely tax-free.
  • Traditional IRAs have required minimum distributions you must take in retirement, while Roth IRAs do not.

In summary, both traditional and Roth IRAs offer some tax-advantaged benefits for retirement savings. Which kind of IRA is best for you depends on whether you want to reduce taxes today (traditional with no plan at work), or in retirement (Roth). Furthermore, considering that both allow for tax-free growth versus a taxable investing account (think about the taxes on dividends, selling for a gain, and the like that would be avoided), almost everyone should utilize one or the other at some point.

Changes for 2016 and what's not changing

There really isn't that much that's changing from 2015. First, here's what's not changing:

  • Contribution limits of $5,500 are the same in 2016 as 2015.
  • The $1,000 additional "catch-up" contribution limit for those 50 and above are also unchanged.

And here are the only notable changes for 2016:

  • Roth IRA income limits for single filers begin to phase out with income between $117,000 and $132,000.
  • Roth IRA income limits for joint filers begin to phase out with income between $184,000 and $194,000.
  • These income limits are $1,000 higher than in 2015.

Here's how it works for the Roth: As long as your adjusted gross income falls below $117,000 for single and $184,000 for joint filers in 2016, you can make the full maximum contributions to a Roth IRA in 2016. Once your income reaches those levels, the amount you can contribute to a Roth decreases as your income increases up to $132,000 for single, and $194,000 for joint filers. Once your income reaches those levels, you are no longer eligible to contribute to a Roth IRA. This is known as the "AGI phase-out range."

However, note that traditional IRAs aren't subject to an income limit, and you can contribute the maximum annual amount (plus catch-ups if you qualify) at any income level. Contributions may not qualify as tax-deductible if your employer offers a retirement plan, but your contributions would still benefit from tax-free growth until you take distributions in retirement.

In summary, these minor changes won't affect the vast majority of Americans, considering that the median net income was slightly over $51,000 in 2014, and is expected to be between 1% and 2% higher in 2015. But it you will be affected next year but are able to make contributions in 2015, it's probably a good idea to max out in 2015. You've got until tax day in April to make your contributions toward 2015.

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