Putting money in a tax-advantaged retirement savings plan is the best way to create a nest egg that will make your retirement comfortable.
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Because inflation is low, many of the IRS limits on contributions to retirement savings plans won't rise from 2015 to 2016, the IRS announced Wednesday.
If you participate in a 401(k), a 403(b), most 457 plans, or the federal government's Thrift Savings Plan, the maximum an employee can sock away in 2016 will stay the same as in 2015 -- $18,000. But this amount doesn't include an employer contribution. An employer can kick in enough to bring the total contribution to $53,000 in 2016, unchanged from 2015, but still a healthy chunk of retirement savings if you're lucky enough to get it.
Let's say, you start saving 10% of your $40,000 salary at age 30 with no employer match. You get 3% annual raises and earn 8% on your savings. You'll have more than $1 million by the time you retire at 67. If you save 15%, you'll be closing in on $2 million.
If your income is modest, the saver's credit is one of the best deals around because Uncle Sam matches your retirement savings by refunding your taxes. A married couple filing jointly can claim the maximum -- $2,000. Heads of household and singles get less. The details are in the chart below. Note, this is a non-refundable credit. While you can reduce your taxes to zero, you can't get back more than you pay. Still, it's an attractive return on your money.
Below is an overview of 2016 IRS retirement savings limitations.
2016 IRS limits for retirement plans
|Retirement plans||2015 contribution limits||2016 contribution limits|
|401(k), 403(b), most 457 plans and federal Thrift Savings Plans||$18,000||$18,000|
|Catch-up contribution limits for workplace plans for people 50 and older||$6,000||$6,000|
|Traditional and Roth IRAs for people under 50||$5,500||$5,500|
|Traditional and Roth IRA catch-up contributions for those 50 and older||$1,000||$1,000|
|Also note that some retirement tax breaks are reduced or not allowed at all if you make what is considered higher income. Most of these phaseout ranges or income limits also were increased because of inflation for the 2015 tax year.|
|Retirement plans||2015 phaseout range based on AGI||2016 phaseout range based on AGI|
|Roth IRA contributions for married couples filing jointly or qualified widow/widowers||$183,000 to $193,000||$184,000 to $194,000|
|Roth IRA contributions for single filers and heads of household||$116,000 to $131,000||$117,000 to $132,000|
|Saver's credit tax income limit for married couples||$61,000||$61,500|
|Saver's credit tax income limit for heads of household||$45,750||$46,125|
|Saver's credit tax income limit for singles||$30,500||$30,750|
Source: Internal Revenue Service
Here are some ways to maximize your retirement savings plans.
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