Know your limits

From coffee and sandwiches to insurance, tuition, or houses, we’re used to the price of things rising every year. Even when inflation is close to zero (at least officially), the numbers always seem to go up.

That’s why it was a bit of a surprise when the IRS announced that 2016 will see no increases in the maximums you can contribute to a 401(k). The limit stands at $18,000. For IRAs it remains $5,000, whether traditional, Roth or combined.

For those who don’t typically max out their contributions this will not be a problem. But it could be for a lot of people, and not just those with high incomes. Anyone who wants to put a big slice of income in retirement savings – whether to make up for lost time, or put away some extra earnings, or to get ready for an early retirement – will be disappointed that the usual increase isn’t happening this year.

If the maximums are getting in the way of your savings goal, you’ve still got options. One is simply to use a taxable savings vehicle such as a brokerage account. You’ll miss the tax advantage, of course. But each dollar saved is still a dollar, plus its all of investment earnings over the coming years, that you can spend when you retire. You’ll also have more control over that money if it’s outside the highly regulated tax-treatment bubble. And on the bright side, you won’t have to make a tough decision about whether to go with a traditional or Roth account.

There are other ways to save on taxes as well. For example, if you have a pre-tax health savings account (HSA) connected to your health insurance, you should know that your HSA money becomes available for any purpose when you reach age 65. It’ll be taxed just like an IRA withdrawal. In fact, savvy investors increasingly use an HSA as a sort of backdoor retirement vehicle to raise the annual pre-tax savings limit, by $3,250 per individual or $6,450 for a family.

We wouldn’t presume to offer tax guidance in a blog post. But professional tax advice is widely available. If you’re interested in building up extra savings in the most tax-efficient way, good for you. If you’re not as concerned about taxes, then buy mutual funds or ETFs, pay down your mortgage, whatever. The main thing is just to save.

And if you haven’t done enough of that in the past, keep in mind that there’s another contribution limit if you’re age 50 or above. The catch-up contribution provision adds $6,000 per year to the annual limit for an employer plan, or $1,000 for an IRA. So whatever your reasons for over-saving, where there’s a will, there’s always a way.

Image courtesy Peter Dutton via Creative Commons