What You Need to Know About 401(k) Taxes in 2016
More than 50 million Americans have accumulated an estimated $4.4 trillion in retirement assets using 401(k) plans, according to figures from the Investment Company Institute. 401(k) plans have gotten so popular because they offer huge tax benefits to their participants that are hard to duplicate anywhere else. Here’s an overview of the tax implications of 401(k) plan accounts for 2016.
- Contribution limits. 401(k) plans include some of the most generous retirement contribution limits you’ll find, easily dwarfing what you can set aside in a conventional IRA. For both 2015 and 2016, the maximum amount employees can set aside in their 401(k) accounts is $18,000 for those under age 50. Those who are 50 or older get an additional $6,000 catch-up contribution, allowing them to save as much as $24,000 in their 401(k)s.
- If you participate in a traditional 401(k), then you can exclude your contributions up to the maximum amount from your taxable income, lowering your tax bill for the year. By contrast, those who choose a Roth 401(k) option get no upfront reduction in their current-year tax bill, but they enjoy tax-free treatment both during their careers and when they take distributions in retirement.
- How 401(k) plans can affect your IRA contribution. The tax laws give people who are not covered by a 401(k) or similar plan at work the unlimited right to use IRAs for retirement savings. However, those who are covered by 401(k)s typically have limitations on the rights to get the full benefits of IRAs.
Read more in the Motley Fool (via the San Antonio Express-News).
David Wingate is an elder law attorney at the Elder Law Office of David Wingate, LLC. The elder law office services clients with powers of attorneys, living wills, Wills, Trusts, Medicaid and asset protection. The Elder Law office has locations in Frederick and Montgomery Counties, Maryland.