IRS increases 2022 pension contribution limits – Forbes Advisor

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Next year you can pocket an additional $ 1,000 in your 401 (k). Annual individual contribution limits for the 401 (k) and many other workplace retirement plans will rise to $ 20,500 in 2022, from $ 19,500 in 2021, the Internal Revenue Service (IRS) announced on the 4th. November.

It’s not part of President Joe Biden’s Build Back Better plan, or any other piece of legislation negotiated. It is simply the annual adjustment for inflation that is already built into the US tax system.

Those who save in Individual Retirement Accounts (IRA) will unfortunately not get higher limits. The 2022 annual contribution limit for IRAs remains at $ 6,000, or $ 7,000 for those 50 or older. Catch-up contributions for 401 (k) and workplace pension plans are also unchanged at $ 6,500, bringing the maximum standard employee contribution to $ 27,000 if they are 50 or older.

The announcement comes after the announcement that Social Security recipients would get a cost of living adjustment (COLA) of 5.9% next year. This number is actually much more important to the bottom line of almost all retirees because relatively few people actually contribute the maximum to their employer-sponsored pension plan.

Adjustments to the contribution limit to the 2022 pension plan

According to the IRS, the following changes will take effect for retirement savers in 2022. Workers with access to a 401 (k), 403 (b), most 457 plans and savings plans can contribute up to $ 20,500 in 2022.

If you have access to a workplace pension plan, you may be able to deduct contributions to a traditional IRA, although those limits have also changed. Partial deductions are available for:

  • Single tax filers earning between $ 68,000 and $ 78,000, up $ 2,000 from 2021.
  • Married couples jointly filing income of $ 109,000 to $ 129,000, up $ 4,000 from 2021.
  • Those who are not covered by a working plan but whose spouses are – the so-called spousal IRA – and jointly earn $ 204,000 to $ 214,000, up $ 6,000 from 2021.
  • Full deductions are available for anyone under the above circumstances who earns less than the ranges provided.

Not everyone is eligible to contribute to a Roth IRA, although others may do so in 2022.

  • Partial contributions are allowed for single tax filers and heads of households with incomes of $ 129,000 to $ 144,000. This is $ 4,000 more than in 2021.
  • The partial contribution range for married couples filing jointly has jumped $ 6,000 from $ 204,000 to $ 214,000.
  • Anyone with annual income below the lower end of these ranges can make a full annual contribution to a Roth IRA – and anyone with annual income above the upper end of these ranges cannot make any contributions to a Roth. IRA.

The rules around the little-known but very effective savings credit, which allows low-income savers to get credit on their taxes for some of their pension contributions, have also changed. The income limit for married couples filing jointly increased from $ 2,000 to $ 68,000, from $ 1,500 for heads of household to $ 51,000 and from $ 1,000 for single and married persons filing separately to 34 $ 000. However, the Saver’s Credit payment structure remains the same.

SIMPLE IRAs, which are used by small businesses, have seen their 2022 annual contribution limit increase from $ 500 to $ 14,000.

However, not all parts of the American retirement system have been stimulated. Those who save in an IRA have not seen an increase, and catch-up contributions to help people 50 or older save more have remained unchanged. The maximum you can save in an IRA is still $ 6,000, unless you are 50 or older, in which case you can save a total of $ 7,000. Catch-up contributions for most employer pension plans remain at $ 6,500; SIMPLE IRA participants can make up to $ 3,000 in catch-up contributions.

The actual value of increases in the contribution limit

While it’s a good thing Americans can put aside a bit more for their retirement in 2022, the reality remains that few people are saving anything near the 2021 limits.

Only about half of all households have a retirement account in the first place, according to the Federal Reserve. Among those who participate in a defined contribution plan at work, very few come close to the maximum.

Less than 9% of savers reached the annual limit in the 2018 tax year, according to a 2021 report from the Congress Research Service, and on average, people have saved about $ 5,500 in their retirement accounts at work.

Almost 16% of people over 65 were saving all the way, the highest percentage of any age group. Unfortunately, they are the ones who have the least time to reap the benefits of compound returns and, therefore, they may have to set aside larger amounts anyway if they fall behind on retirement savings. . Only 2% of workers under 35 saved the maximum amount.

Young workers can, however, be reassured; they probably don’t need to try and maximize their 401 (k) anyway, especially when that would be a huge percentage of most of their salaries. Instead, they should just save half of each raise, rather than a fixed percentage of their pay, according to financial planner Michael Kitces.

This means that a worker who started making $ 40,000 at the age of 22 and ended up earning $ 70,000 later in his career would save $ 15,000 per year, or more than 20% of his salary.

Setting aside a high percentage of your increases, rather than a fixed percentage of your overall salary, helps limit the drift in your lifestyle, making it easier to save for retirement.

Either way, it’s easier than saving $ 27,000 a year.

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