2016 contribution limits for retirement accounts.

There are different limits for each type of account. In addition, each type of retirement account may have different rules for the tax treatment of contributions, distributions and conversions.

If you’re looking to reduce your taxable income, whether before or after retirement, maximizing your contributions to various types of retirement accounts may be beneficial.

Account

401(k), 403(b), and 457

Contribution limit Additional catch-up contribution for people age 50 and older
$18,000 $6,000

SIMPLE IRA

Contribution limit Additional catch-up contribution for people age 50 and older
$12,500 $3,000

QRP/Keogh and SEP-IRA

Contribution limit Additional catch-up contribution for people age 50 and older
20% of net self-employment income (or 25% of compensation) up to $53,000 None

Individual 401(k)

Contribution limit Additional catch-up contribution for people age 50 and older
20% of net self-employment income (or 25% of compensation) plus $18,000, up to $53,000 $6,000

Traditional IRA and Roth IRA

Contribution limit Additional catch-up contribution for people age 50 and older
$5,500 $1,000

401(k) tax rules.

Withdrawals of pre-tax contributions and earnings from your traditional 401(k) are generally taxable as ordinary income and must be reported on your Form 1040, 1040A, or 1040NR.

Early withdrawals from your retirement plans—those made before you reach age 59½—are generally subject to a 10% penalty, in addition to federal income tax due at your ordinary rate. It’s your responsibility to calculate and pay the 10% penalty on any early withdrawals (plus any state penalties and income taxes that may apply).

There are some circumstances under which early withdrawals are permissible without the 10% penalty. Here are some examples of these exceptions.

Exceptions to early withdrawal penalties

401(k)s and 403(b)s IRAs
Distributions due to total and permanent disability. Distributions due to total and permanent disability.
You left the company sponsoring the plan in or after the year you turned 55. You were unemployed and paid health insurance premiums.
You had unreimbursed medical expenses greater than 7.5% of your adjusted gross income (AGI). You had unreimbursed medical expenses greater than 7.5% of your adjusted gross income (AGI).
Withdrawals as part of an IRS levy of the plan. Withdrawals as part of an IRS levy of the plan.
The distribution was made according to a qualified domestic relations order (QDRO). You paid for qualified higher education expenses for yourself or a dependent.
Distributions made to your beneficiary or estate on or after your death. Distributions made to your beneficiary or estate on or after your death.
Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary.

Note: you must separate from service with this employer before the payments begin for this exception to apply
Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary.

Note: you must separate from service with this employer before the payments begin for this exception to apply
Withdrawals under the HEART Act for active military. You received Inherited IRA distributions.
IRA distributions made for the purchase of a first home, up to $10,000.

IRA tax rules.

A few notes about traditional IRA contribution limits.

Money that you invest in a traditional IRA is generally tax-deductible. However, if you’re an active participant in a qualified workplace retirement plan, like a 401(k) or 403(b), restrictions apply:

  • If you’re a single filer, your contribution is partially deductible if your modified adjusted gross income (MAGI) is between $61,000 and $71,000.
  • If you’re a married couple filing jointly, your 2016 contribution is partially deductible if your MAGI is $98,000 to $118,000.
  • If you don’t participate in a retirement plan at work but your spouse does and you file jointly, your contribution is partially deductible if your MAGI is $184,000 to $194,000.²
  • If you contribute more than the law allows in any year based on contribution or income limits for your filing status or age limitations (e.g., you can’t contribute to a traditional IRA past age 70½), the penalty is 6% of the excess amount for each year in which you fail to take corrective action.

Just as with 401(k)s, there are IRA withdrawal rules.

If you withdraw money from your IRA before age 59½, you will incur a 10% federal penalty plus ordinary income tax on the amount attributable to previously deductible contributions and earnings (state penalties and income taxes may also apply). There are some exceptions to this rule, including:

  • Disability or death of the IRA owner.
  • Withdrawals that constitute a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner.
  • Withdrawals used to pay for unreimbursed medical expenses that exceed 7.5% of your AGI.
  • Withdrawals used for a first-time home purchase (subject to a lifetime limit of $10,000).
  • Withdrawals used to pay for the qualified higher-education expenses of the IRA owner and eligible family members.

Even if you avoid the 10% penalty, you’ll still pay ordinary income tax. More importantly, you’ll have less money working toward your retirement because you’ll lose out on any future potential tax-deferred compounding.

Roth IRA tax rules.

A Roth IRA is an individual retirement account to which you make contributions with after-tax dollars. The benefits of a Roth IRA are that your contributions can grow tax-free and you can generally make qualified withdrawals tax- and penalty-free after you reach age 59½.

A few words about Roth IRA 2016 contribution limits:

  • If you’re a single filer and your MAGI is $116,000 or less, your contribution limit is $5,500 (or $6,500 if you’re 50 or older) in 2016.
  • The contribution limit is gradually reduced for those with MAGIs of $117,000 to $132,000.
  • If you’re a married couple filing jointly and your MAGI is $183,000 or less, your contribution limit is $5,500 ($6,500 if you’re 50 or older).
  • That contribution limit is gradually reduced for those with MAGIs of $184,000 to $194,000.

Anyone can convert all or part of a traditional IRA to a Roth IRA, regardless of income level or filing status, by following the Roth IRA conversion rules. Converting could be advantageous if you expect to be in the same or a higher tax bracket when you withdraw the money, have a reasonably long time horizon, and can afford to pay the conversion tax from a source other than your IRA at the time of conversion.

There are different Roth IRA withdrawal rules, depending on the length of time you’ve had the account and your age when you make withdrawals.

Tax rules for inherited IRAs.

An inherited IRA is an account you can open and transfer money into if you are the beneficiary of an IRA or an employee-sponsored retirement plan. As a beneficiary, you can’t make additional contributions, but you do have options, including growing your inherited funds tax-deferred.

Take a look at our overview of inherited IRA withdrawal rules, including our withdrawal calculator. In addition, please consult a tax professional if you are the beneficiary of a retirement account.

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