IRS Changes the 401(k) Contribution Limit
By Blake C. Adams, MBA, CPFA
You have three choices for every dollar that comes your way. You can spend it, save it, or give it away. Having a good balance in these three categories makes for a happy financial present and future.
Recently, the IRS announced some changes to the 401(k) limit that will make it possible to save more money for retirement. Beginning in 2022, the contribution limit for an employee that participates in 401(k), 403(b), and most 457 plans increased $1,000. This change is due to an annual inflation adjustment that is built into the tax code. The limit in 2022 is now $20,500, up from 2021’s limit of $19,500. If you were contributing the maximum in 2021 and want to continue or start doing this in 2022, you will want to review and adjust your contributions to take full advantage of the higher limit.
If you are over the age of 50, the tax code allows for catch-up contributions to help people closer to retirement maximize their contributions. The limit for catch-up contributions remains unchanged at $6,500. So, for those 50 and up they can contribute a maximum of $27,000 toward their 401(k) plans.
For retirement savers who rely on an IRA or a Roth IRA, the limit on annual contributions remains the same in 2022 at $6,000 along with the catch-up contribution of $1,000 for those 50 and over. If you are thinking you can contribute money to a 401(k) at work and also fund an IRA, you should be aware that there are income limits where the deduction is phased out until it is reduced entirely. This is also true if your spouse is covered by a retirement plan at work and you are not. The rules depend on your filing status and your modified AGI so you will want to be sure of your individual situation if this applies to you.
If you are looking for some motivation to save more in your retirement account, consider what compound returns can do for your savings. That extra $1,000 you save this year, would be worth $1,967 ten years from now based on a seven percent return and annual compounding or $2,594 based on a ten percent return and annual compounding.
If you have any questions about your 401(k) plan before the end of the year, please let us know. We’d love to assist you as you plan for retirement.