Funding Your Retirement Accounts in 2016

By on December 9, 2015 in Current Events, Retirement with 20 Comments

The end of the calendar year is closing in on us and April 15 is just around the corner. That’s the last day that you can contribute to an IRA for 2015.

There are three different types of IRA and this article is designed to differentiate between the different types, and to discuss the requirements for investing in them. We will look at the three types of IRA in the order of their appearance on the retirement investing scene.

First on the scene (in 1974) was what is today referred to as a traditional deductible IRA. To contribute to a traditional deductible IRA, you must have earned income and be under the age of 70 ½. In a traditional deductible IRA:

  • Contributions are from pre-tax dollars
  • The money in the IRA grows tax deferred
  • When the money is withdrawn, all of it is taxed as ordinary income
  • There is a 10% early withdrawal penalty for any money you take out before the age of 59 ½
  • There is a 50% penalty for failing to take a MRD each year once you reach the age of 70 ½

BUT WAIT! You cannot deduct IRA contributions if your income is over certain levels and you belong to a retirement plan through your employer (as all federal employees do).

If your filing status is single you can fully fund a traditional deductible IRA if your income is below $61,000; you may partially fund it if your income is between $61,000 and $71,000; you may not fund it at all if your income is over $71,000. These numbers are the same for 2015 and 2016.

If your filing status is joint and your spouse also belongs to a retirement plan at work you can fully fund a traditional deductible IRA if your income is below $98,000; you may partially fund it if your income is between $98,000 and $118,000; you may not fund it at all if your income is over $118,000. The numbers are the same for 2015 and 2016.

If your filing status is joint and your spouse does not belong to a retirement plan at work you can fully fund a traditional deductible IRA for your spouse if your income is below $183,000; you may partially fund it if your income is between $183,000 and $193,000; you may not fund it at all if your income is over $193,000. The numbers for 2016 are $184,000 and $194,000. Your own IRA contributions will still be governed by the limits in the preceding paragraph as you belong to a retirement plan.

In 1987, as a result of the Tax Reform Act of 1986, the traditional non-deductible IRA appeared. To contribute to a traditional non-deductible IRA, you must have earned income and be under the age of 70 ½. In a traditional non-deductible IRA:

  • Contributions are from after-tax dollars
  • The money in the IRA grows tax deferred
  • When the money is withdrawn, the earnings are taxed as ordinary income
  • There is a 10% early withdrawal penalty for any earnings you take out before the age of 59 ½
  • There is a 50% penalty for failing to take a MRD each year once you reach the age of 70 ½

There are no income limits on contributing to a traditional non-deductible IRA.

1997 brought us the Roth IRA. It has several differences from the traditional IRAs that may be to your advantage if you meet the income restrictions. To contribute to a Roth IRA you must have earned income, but can be of any age. In a Roth IRA

  • Contributions are from after-tax dollars
  • The money in the IRA grows tax-free in most circumstances
  • If when the money is withdrawn, the account has been open for at least five years and you are at least age 59 ½ the earnings are tax-free
  • There is a 10% early withdrawal penalty for any earnings you take out before the age of 59 ½
  • You are never required to take a RMD

BUT WAIT! There are income restrictions on contributing to a Roth IRA.

If your filing status is single you can fully fund a Roth IRA if your income is below $116,000; you may partially fund it if your income is between $116,000 and $131,000; you may not fund it if your income is over $131,000. For 2016 the numbers are $117,000 and $132,000.

If your filing status is joint you can fully fund a Roth IRA if your income is below $183,000; you may partially fund it if your income is between $183,000 and $193,000; you may not fund it if your income is over $193,000. For 2016 the numbers are $184,000 and $194,000.

You are allowed to convert a traditional IRA to a Roth IRA regardless of your income level.

IRS Publication 590-A has the rules on contributing to IRAs.

You are allowed to contribute $5,500 to an IRA and an additional $1,000 beginning in the year you turn 50. These contribution limits are the same for both 2015 and 2016. You can contribute to an IRA even if you are fully funding your Thrift Savings Plan.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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