Inflation-adjusted limits offer additional savings opportunity
This year, investors have an even greater opportunity to save for retirement. The IRS recently released its inflation-adjusted contribution limits for 2022, which brings not only a lift in the salary deferral limit, but the profit-sharing plan annual limit as well.
The Internal Revenue Service announced that employees in 401(k) plans will be able to contribute up to $20,500 this year, an increase of $1,000 from 2021. If you are over 50, you can make an additional $6,500 catch-up contribution. This and other changes in Notice 2021-61 (PDF), provides cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2022.
Key changes for 2022
- 401(k) salary deferral limit at $20,500 per individual 401(k)
- Profit Sharing Plan annual limit increased to $61,000
- Health Savings Account (HSA) contribution limits increased to $7,300 for family coverage and $3,650 for individual
Stayed the same:
- 401(k) catch-up contributions at $6,500 for those over 50
- HSA catch-up contributions at $1,000 for those over 55 for both single and family
- IRA annual contribution limit at $6,000
- IRA catch up contributions at $1,000 for those over 50
Other notable changes:
In 2022, the adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA is $204,000 to $214,000 for married couples filing jointly, up from $198,000 to $208,000 in 2021. For singles and heads of household, the income phase-out range is $129,000 to $144,000, up from $125,000 to $140,000 in 2021.
If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions. Although at the time of publishing the Build Back Better Bill is not passed, however it is anticipated that when it does, it will cut this Roth “Back Door” strategy.
Catching up on 2021 IRA contributions:
If you stalled your normal contributions, or didn’t save as much as you’d hoped, it’s not too late to catch up on 2021 savings.
2021 IRA contributions can be made until April 15, 2022. If you happen to be ahead and exceed the 2021 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). If you do not, you must pay a 6% tax each year on the excess accounts left in your account.
Consider adjusting your savings goals to increase your savings and maximize your contributions in 2022. These annual increases are just one more savings opportunity that are essential to accumulating wealth; it is wise to take advantage of the maximum benefit allowed under the law.
Looking to ensure you are taking advantage of the limits as they apply to your personal situation? For a complimentary consultation, reach out to our team.