• Thinking of Tapping Your Retirement Savings? Read This First

    22 May 2017
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    Before you start tapping into your retirement savings, you may want to read this first:

    If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.

    The following exceptions may help you avoid the penalty:

    • Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
    • IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
    • Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
    • Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
    • IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
    • IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
    • IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.

    You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.

     

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  • Want to Reduce Required Minimum Distributions and Extend Your Retirement Benefits?

    11 May 2017
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    Do you find that your required minimum distributions (RMDs) from qualified plans and IRAs are providing unneeded income and a high tax bill? Or, are you afraid that the government’s RMD requirements will leave too little in your retirement plan for your later years? If you answered yes to either of these, good news! You can now use a qualified longevity annuity contract (QLAC) to reduce your RMDs and extend the life of your retirement distributions.

    The government allows individuals to purchase QLACs with their retirement funds, thus reducing the value of those funds (subject to the RMD rules) and in turn reducing the funds’ annual RMDs.

    A QLAC is a deferred-income annuity that begins at an advanced age and that meets the stringent limitations included in the tax regulations. One benefit of a retirement-planning strategy involving QLACs is that they provide a form of longevity insurance, allowing taxpayers to use part of their retirement savings to buy an annuity that helps protect them from outliving their assets.

    The tax-planning benefits of QLACs are twofold:

    • Because the QLAC is purchased using funds from a qualified retirement plan or IRA, that plan’s year-end balance (value) is lowered. This causes the RMDs for future years to be less than they otherwise would be, as the RMD is determined by dividing the account balance (from 12/31 of the prior year) by an annuity factor that is based on the retiree’s age.

    Example: Jack is age 74, and the annuity table lists his remaining distribution period as 23.8 years. The balance of his IRA account on 12/31/2016 is $400,000. Thus, his RMD for 2017 would be $16,807 ($400,000 / 23.8). However, if Jack had purchased a $100,000 QLAC with his IRA funds during 2016, his balance would have been $300,000, and his 2017 RMD would be $12,605 ($300,000 / 23.8). By purchasing the $100,000 QLAC, Jack would have reduced his RMD for 2016 by $4,202 ($16,807 – $12,605). This reduction would continue for all future years. Later, the $100,000 QLAC would provide retirement benefits, likely beginning when Jack reaches age 85.

    (2) Tax on the annuity will be deferred until payments commence under the annuity contract.

    A deferred-income annuity must meet a number of requirements to be treated as a QLAC, including the following:

    Limitation on premiumsWhen buying a QLAC, a taxpayer can use up to the lesser of $125,000 or 25% of his or her total non-Roth IRA balances. The dollar limitation applies to the sum of the premiums paid on all QLAC contracts.

    When distributions must commence Distributions under a QLAC must commence by a specified annuity starting date, which is no later than the first day of the month after the taxpayer’s 85th birthday.

    For additional details about how QLACs might fit into your retirement strategy, please give Dagley & Co. a call.

     

     

     

     

     

     

     

     

     

     

     

     

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  • Missed a 60-Day Rollover? There May Be Relief

    26 January 2017
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    Miss a 60-day rollover? According to the IRA, the acceptable reasons for missing include: An error was committed by the financial institution, the distribution check was misplaced and never cashed, the distribution was mistakenly deposited into an account that the taxpayer thought was an eligible retirement plan, the taxpayer’s principal residence was severely damaged, a member of the taxpayer’s family died, the taxpayer or a member of the taxpayer’s family was seriously ill, the taxpayer was incarcerated, restrictions were imposed by a foreign country, a postal error occurred, or the distribution was made on account of an IRS levy, and the proceeds of the levy have been returned to the taxpayer. If you, or someone you know, fall into any of these situations, as a taxpayer, you can take a distribution from an IRA or other qualified retirement plan and if they roll it over within 60 days they can avoid taxation on the distributed amount.

    Financial Institution Error – Where the failure to meet the deadline is due to financial institution error, the IRS provides an automatic waiver.

    Private Letter Ruling (PLR) – Where automatic waiver does not apply, and the taxpayer feels there is a legitimate reason for missing the 60-day rollover requirement, the taxpayer can request relief though a PLR where the IRS reviews the reason for missing the 60-day rollover period and either allows or denies relief from the 60-day requirement. However, the IRS will charge the taxpayer requesting the PLR a user fee of $10,000, which negates the purpose of a PLR except in cases of very large rollover amounts.

    New Self-Certification Procedure – The IRS recently announced a new certification procedure that allows a taxpayer who misses the 60-day time limit for properly rolling the amount into another retirement plan or IRA to make a written certification to a plan administrator or an IRA trustee that a contribution satisfies one of the acceptable reasons, and therefore is eligible for a waiver of the 60-day rule.

    Please remember: This provision does not apply to required minimum distributions for taxpayers who are 70.5 years of age and over.). Also, taxpayers are limited to one IRA-to-IRA rollover per year.

    The rollover must be completed as soon as practicable after the reason(s) listed above no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.

    This procedure does not apply where the IRS previously denied a waiver request for the same missed rollover.

    The IRS provides a model letter that can be used to make the self-certification. Please call Dagley & Co. if you need a copy of the letter, have questions, or need assistance related to a missed 60-day rollover.

     

     

     

     

     

     

     

     

     

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  • Looking for Ways to Maximize Your Retirement Contributions?

    16 September 2016
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    Are you a sole proprietor with no full-time employees other than yourself and/or your spouse? Also, are you are seeking to maximize your retirement plan contributions? If so, a Solo 401(k) may be right for you. The key benefits of a Solo 401(k) plan are as follows:

    • Manage your own account directly without any brokers, banks, or trust companies as middlemen.
    • Generally contribute larger amounts, approximately equal to the 401(k) and profit-sharing amounts combined.
    • Legally avoid the unrelated business income tax (UBIT) that would apply to certain self-directed IRA transactions.
    • Make Roth contributions to the 401(k) element (not the profit-sharing part) of the plan, regardless of the AGI limitations that apply to regular Roth contributions.
    • Transfer existing retirement funds into the Solo 401(k).
    • Direct your investments with absolutely no restrictions on investment choices (including real estate, private companies, foreign assets, precious metals, etc.).

    Solo 401(k) Contributions – The maximum annual contribution to a Solo 401(k) for 2016 is $53,000 but not exceeding 100% of compensation. The Solo 401(k) contribution consists of two parts: (1) a profit-sharing contribution of up to 20% of net self-employment income for unincorporated businesses or 25% of W-2 income for incorporated businesses and (2) a salary-deferral contribution (same as the 401(k)) of as much as 100% of the first $18,000 ($24,000 if age 50 or over) of the remaining compensation after the profit-sharing contribution, as a tax-deductible contribution.

    Given sufficient income, a self-employed individual and spouse (assuming the spouse is employed in the same business) may contribute, for 2016, up to $106,000 combined. Because of the way the contribution is calculated, a larger contribution can usually be made into a Solo 401(k) than to a Keogh or SEP IRA at the same income level.

    Discretionary Funding –The funding of the Solo 401(k) plan is completely discretionary and flexible every year. Funding can be increased, decreased, or skipped entirely, if necessary.

    Where Deducted – If your business is organized as a Subchapter S or C corporation, or LLC electing to be taxed as a corporation, then you are an employee of the business, so the salary-deferral contribution reduces your personal W-2 earnings and the profit-sharing contribution is deducted as a business expense.

    For a sole proprietorship, a partnership, or an LLC taxed as a sole proprietorship, the owner’s salary-deferral and profit-sharing contributions are deductible only from personal income (i.e., on page 1 of Form 1040, as an adjustment to gross income), and not as an expense of the business.

    Deadlines – The deadline for establishing a Solo 401(k) is December 31st for an individual or the fiscal year end for corporations. For unincorporated businesses, the deadline for making the contributions is the regular April income tax filing due date plus extensions. For incorporated businesses, the deadline is 15 days after the close of the fiscal year.

    Roth Option – The 401(k) portion of the contribution can be designated as a non-deductible qualified Roth contribution, provided the plan document permits Roth contributions.

    If you think a Solo 401(k) might be right for you, please call Dagley & Co. at (202) 417-6640 for further details. We will help you to determine if your particular circumstances permit you have, and whether you will benefit from a Solo 401(k).

     

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  • Preparing Your Own Tax Return? That May Not Be a Wise Decision.

    14 September 2016
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    At Dagley & Co. we hear a lot about the complexity of the tax code, as well as a lot of rhetoric from Washington about simplifying it. Tax codes were originally written to bring in money (taxes) to pay for government costs. But over the years, Congress has used tax codes more as a tool to manage social reform. As a result, the code has become very complex.

    So with taxes becoming more complex with each passing year, why do people think they can prepare their own returns? We use software-costing thousands of dollars, so why do individuals, not educated in tax law and using low-cost computer software, think they can get their tax result right? Well, they may not, and they may miss deductions, credits, income exclusions, retirement benefits, and even more beneficial filing options just to save a few bucks on tax preparation costs.

    However, paying a little more in tax than they need to should not be their biggest concern. A more troublesome situation is getting more tax refund than they are entitled to, and then a year or two later getting a letter from the IRS wanting the excess back. This is especially devastating to lower-income individuals and families that spend what they bring in just making ends meet and have no savings to fall back on when the IRS comes calling, leaving them with even a bigger financial hole.

    To make matters worse, they may not even understand the IRS letter or the issue it is dealing with, and since they did their own return, they have no one to call for help in getting the tax assessment reduced or knowing how to get penalties abated.

    Professional tax preparation offers more than just entering numbers into a computer program. If you usually file your own tax returns, perhaps you should consider a firm that can not only prepare your taxes properly, but also provide tax, financial and retirement guidance. We are also here to help plan for the future. Give Dagley & Co., CPA’s a call this year, we are here to help.

     

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  • Clock is Ticking for Retirement Plan Contributions

    25 March 2016
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    Were you aware that even after the close of the tax year you can make tax-deductible retirement savings contributions? Well, you can, and with the April tax deadline looming, the window of opportunity to maximize retirement and other special-purpose plan contributions for 2015 is closing. Many of those contributions not only build the retirement nest egg but also deliver tax deductions for the 2015 tax return. Let’s take a look at some of the ways a taxpayer can benefit.

    Traditional IRA – The maximum contribution to an IRA for 2015 is $5,500 ($6,500 if over 49 years old). The 2015 contribution can be made up until April 18th. If the taxpayer is covered by another retirement plan, some or all of the contribution may not be deductible. To be eligible to contribute to an IRA of any type, the taxpayer, or spouse if married filing jointly, must have earned income, such as wages or self-employment income.

    Roth IRA – This is a nondeductible retirement account, but the earnings are tax-free upon withdrawal, provided that the holding period and age requirements are met. Roth IRAs are a good alternative for many taxpayers who aren’t eligible to deduct contributions to a traditional IRA. The maximum deductible contribution for the 2015 tax year is $5,500 ($6,500 if the taxpayer is over 49 years old). The 2015 contribution can be made up until April 18th.

    Caution: The combined traditional IRA and Roth IRA contributions are limited to $5,500 ($6,500 if the taxpayer is over 49 years old).

    Spousal IRA – A non-working spouse can open and contribute to a traditional IRA or Roth IRA based upon the working spouse’s earned income, subject to the same contribution limits as the working spouse, but the combined contributions of both spouses cannot exceed the earned income of the working spouse. Contributions to spousal IRAs for 2015 must also be made by April 18th.

    SEP-IRA (Simplified Employee Pension) – SEP-IRAs are tax-deferred plans for sole proprietorships and small businesses. They are probably the easiest way to build retirement dollars, requiring virtually no paperwork. Maximum contributions depend on your net earnings from your business. For 2015, the maximum contribution is the lesser of 25 percent of compensation or $53,000. The 2015 contribution can be made up to the due date of the return, including extensions. Thus, unlike a traditional or Roth IRA, funding of a SEP-IRA for 2015 may occur up to October 17, 2016, when an extension has been granted.

    Solo 401(k) Plans – A growing number of self-employed individuals with no employees are forsaking the SEP-IRA for a newer type of retirement plan called the Solo 401(k), or Self-Employed 401(k), mostly for its higher contribution levels.

    For 2015, the maximum contribution to a Solo 401(k) is the sum of (A) up to 25% of compensation and (B) salary deferral up to $18,000. The total of A and B can’t exceed $53,000 or 100% of compensation. Note that a Solo 401(k) account must have been established by December 31, 2015, to make 2015 contributions, which can then be made up to the extended due date of the return (October 17, 2016, for most taxpayers). If a Solo 401(k) account was not established by the end of 2015, open one now for 2016 contributions.

    Health Savings Accounts (HSA) – An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary. An HSA is designed to assist individuals who have high-deductible health plans (HDHP). A taxpayer is only eligible to establish an HSA if he or she has an HDHP. For 2015, this means that the plan must have a deductible amount of $1,300 or more for self-only coverage or $2,600 for family coverage. In addition, the annual maximum out-of-pocket costs for covered expenses can’t exceed $6,450 for a self-only plan or $12,900 for a family plan.

    The maximum 2015 contribution for eligible individuals with self-only coverage under an HDHP is $3,350, while an eligible individual with family coverage under an HDHP can contribute up to $6,650. The contribution limit is increased by $1,000 for an eligible individual who was age 55 or older at the end of 2015; however, no contribution can be made as of the month that an individual is enrolled in Medicare.

    Amounts contributed to an HSA belong to individuals and are completely portable. Every year, the money not spent on medical expenses stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that may be forfeited if not used by the end of the year). Contributions to an HSA for 2015 can be made through April 18, 2016.

    Coverdell Education Savings Account – These plans were originally called Education IRAs, but that moniker created confusion because they were really not retirement accounts. They are now called Coverdell Education Savings Accounts, named after the late Senator from Iowa. Contributions, which can be made for a beneficiary who is under 18 years of age, are not tax-deductible, but the money grows tax-free if the distributions are used to pay qualified education expenses. The maximum annual contribution is $2,000 per beneficiary, but this amount could be reduced partly or totally depending on income. Contributions do not count toward IRA annual contribution limits; they are also due by April 18, 2016, to be considered as having been made for 2015.

    Please note that information for each plan or account above has been abbreviated. Contact Dagley & Co. for specific details on how they may apply to your situation.

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  • Are You Ignoring Retirement?

    24 January 2016
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    The time is now. If you’re still young, working 9 to 5, and caring for children or elders, retirement is something you need to be aware of and not put off for the last minute. Some people ignore the issue until late in life and then have to scramble at the last minute to fund their retirement. Others even ignore the issue altogether, thinking their Social Security income (assuming they qualify for it) will take care of their retirement needs.

    By current government standards, a single individual with $11,770 or a married couple with $15,930 of annual household income is at the 100% poverty level. If you compare those levels with potential Social Security income, you may find that expecting to retire on just Social Security income may result in a bleak retirement.

    You can predict your future Social Security income by visiting the Social Security Administration’s Retirement Estimator. With the Retirement Estimator, you can plug in some basic information to get an instant, personalized estimate of your future benefits. Different life choices can alter the course of your future, so try out different scenarios – such as higher and lower future earnings amounts and various retirement dates – to get a good idea of how these scenarios can change your future benefit amounts. Once you’ve done this, consider what your retirement would be like with only Social Security income.

    If you are fortunate enough to have an employer-, union- or government-funded retirement plan, determine how much you can expect to receive when you retire. Add that amount to any Social Security benefits you are entitled to and then consider what retirement would be like with that combined income. If this result portends an austere retirement, know that the sooner you start saving for retirement, the better off you will be.

    With today’s relatively low interest rates and up-and-down stock market, it is much more difficult to grow a retirement plan with earnings than it was 10 or 20 years ago. With current interest rates barely mirroring inflation rates, there is little or no effective growth. That means one must set aside more of one’s current earnings for retirement to prepare for a comfortable retirement.

    Because the government wants you to save and prepare for your own retirement, tax laws offer a variety of tax incentives for retirement savings plans, both for wage earners and for self-employed individuals and their employees. These plans include:

    Traditional IRA – This plan allows up to $5,500 (or $6,500 for individuals age 50 and over) of tax-deductible contributions each year until reaching age 70½. However, the amount that can be deducted phases out for higher-income taxpayers who also have retirement plans through their employer.

    Roth IRA – This plan also allows up to $5,500 (or $6,500 for individuals age 50 and over) of contributions each year. Like the Traditional IRA, the amount that can be contributed phases out for higher-income taxpayers; unlike the Traditional IRA, these amounts phase out even for those who do not have an employer-related retirement plan.

    myRA Accounts – This relatively new retirement vehicle is designed to be a starter retirement plan for individuals with limited financial resources and those whose employers do not offer a retirement plan. The minimum amount required to establish one of these government-administered plans is $25, with monthly contributions as little as $2. Once the total value of the account reaches $15,000 or after 30 years, the account must be converted to a commercial Roth IRA account.

    Employer 401(k) Plans – An employer 401(k) plan generally enables employees to contribute up to $18,000 per year, before taxes. In addition, taxpayers who are age 50 and over can contribute an extra $6,000 annually, for a total of $24,000. Many employers also match a percentage of the employee’s contribution, and this can amount to a significant sum for those who stay in the plan for many years.

    Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay medical expenses, these accounts can also be used as supplemental retirement plans if an individual has already maxed out his or her contributions to other types of plans. Annual contributions for these plans can be as much as $3,350 for individuals and $6,750 for families.

    Tax Sheltered Annuities – These retirement accounts are for employees of public schools and certain tax-exempt organizations; they enable employees to make annual tax-deferred contributions of up to $18,000 (or $24,000 for those age 50 and over).

    Self-Employed Retirement Plans – These plans, also referred to as Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual’s taxable net profits), so the actual amount that can be contributed is 20% of the net profits.

    Simplified Employee Pension (SEP) – This type of plan allows contributions in the same amounts as allowed for self-employed retirement plans, except that the retirement contributions are held in an IRA account under the control of the employee or self-employed individual. These accounts can be established after the end of the year, and contributions can be made for the prior year.

    Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are examples of events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.

    If you have questions about any of the retirement vehicles discussed above, please give Dagley & Co. a call.

     

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  • Breaking News: IRS Releases Pension Limits For 2016

    4 November 2015
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    You’ve heard it once, and you’re hearing it again: Saving for retirement is one of the most important things a person should do. Contributing to tax-advantaged retirement plans while you are working is one of the best ways to build up that nest egg. That said, the tax law doesn’t allow unlimited annual contributions to these plans.

    If you have been wondering how much you can contribute to your retirement plans in 2016, the IRS has released the inflation-adjusted limits for next year’s contributions. Since inflation has been low this past year (according to the government’s calculation), most limits won’t increase over what they were in 2015, but some of the AGI phaseout thresholds that work to reduce allowable contributions will change. Here’s a review of the 2016 numbers:

    For 401(k) plans, the maximum contribution will be $18,000 again. If you are age 50 or over, that limit is increased by a so-called “catch-up” contribution to a maximum of $24,000, the same as in 2015. These limits also apply to 403(b) tax sheltered annuities and 457 deferred compensation plans of state and local governments and tax-exempt organizations.

    Traditional IRA and Roth IRA contributions are limited to a combined total of $5,500 ($6,500 if you are age 50 or over), also unchanged from 2015. However, both types of IRAs have certain income (AGI) limitations.

    When you are an “active participant” in another qualified plan, the traditional IRA contributions are only deductible by lower-income individuals, and the deductibility phases out for unmarried tax filers with AGIs between $61,000 and $70,999. For married joint filers the phaseout range is between $98,000 and $117,999. The phaseout of traditional IRA contributions starts at $0 AGI for married individuals filing separately and tops out at $10,000—essentially, MFS filers rarely qualify to contribute to an IRA if they or their spouses also participate in an employer’s plan. For married couples in which one spouse is an active participant and the other is not, the phaseout AGI limitation for the non-active participant spouse has gone up by $1,000 and is between $184,000 and $193,999.

    Roth IRA contributions are never tax deductible, although they do enjoy tax-free accumulation. However, the contribution limits are phased out for unmarried taxpayers with AGIs between $117,000 and $131,999. For married joint filers the phaseout range is between $184,000 and $193,999. Each of these amounts reflects a $1,000 increase for 2016. Married individuals filing separately are not allowed Roth IRA contributions if their AGI is $10,000 or more. The AGI phaseouts will limit the contributions you can make to a Roth IRA even if you do not participate in an employer’s plan or other qualified plan. Unlike traditional IRAs, contributions to which cannot be made after you reach age 70½, contributions can be made to a Roth IRA as long as you have earned income of an equal amount.

    If you are self-employed and have a self-employed retirement plan (SEP), the maximum contribution is the lessor of $53,000 (the same limit as for 2015) or 20% of the net earnings from self-employment; contributions are allowed regardless of age. If your retirement plan is a profit-sharing Keogh plan, the limitations are the same. For defined benefit plans the amount contributed can’t create an annual benefit in excess of the greater of $210,000 or 100% of your average compensation for the highest 3 years.

    Simple IRA or Simple 401(k) plan contribution limits will be $12,500 or $15,500 for those ages 50 or over. These amounts are unchanged from 2015.

    If have questions or would like to discuss your retirement contribution options, please get in touch with us at Dagley & Co! You’ll find our information at the bottom of this page.

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