Earlier this month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2022. It appears many of these tax advantaged savings opportunities have increased from 2021.
Most working professionals have access to a 401k plan or 403b plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. For 2022, you can contribute up to $20.5k into a 401(k) or 403(b) plan through salary deferrals, up from $19.5k in 2021.
Anyone 50 or older by December 31, 2022 can contribute an extra $6,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $27k, up by $1k from the 2021 max. Please note that you don’t need to actually wait until your 50th birthday to be able to start making these catch-up contributions, so adjust your deferrals as of the first paycheck of that monumental year.
Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE’s work just like 401(k) plans, which means it’s up to each employee to fund the bulk of his or her retirement savings account through salary deferrals. For 2022, the maximum contribution into your SIMPLE as salary deferrals increases to $14k, up $500 from last year’s limit of $13.5k. Anyone 50 or older by December 31st can put away an additional $3k in 2022, for a total annual salary deferral of $17k. Your employer will generally make matching contributions into your account of up to 3% of your salary.
And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2022 increases by $3k to $61k. Solo 401k’s allow self-employed individuals to hit the $61k max on less income and also increases the max for people 50 and over to $67.5k.
And lastly, the maximum salary for many retirement plan calculations jumps to $305k for 2022, up by $15k from the 2021 max of $290k.
Increase to IRAs
Don’t forget about IRA’s. Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $6,000 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount you both contribute. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $7,000. You have until April 15, 2022 to contribute to your IRAs for 2021.
There is a bit of good news for people looking to contribute to a Roth IRA in 2022. The amount you can earn and still contribute to a Roth increases by $4k for single individuals and $6k for joint filers as follows:
- Single Individuals – Phase-out begins $129,000 and ends at $144,000
- Married Couples – Phase-out begins $204,000 and ends at $214,000
If your income is too high for a Roth, don’t forget that the rules changed more than a decade ago, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA. This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts. (Stay tuned as these rules might change again in 2022.)
And finally, if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $204k – $214k for 2022, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2022 Retirement Savings Budget
Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2021 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2022.
Also For 2022 – the Social Security wage base increases to $147,000
This is an increase of $4,200 from the 2021 wage base threshold of $142,800. The social security tax withheld from employee pay is at a flat rate of 6.2% of wages. Once an employee’s compensation reaches $147,000 in 2022, social security taxes are no longer withheld from pay. Based upon this wage base for 2022, the maximum amount of social security tax withheld from an employee’s pay will be $9,114.
Summary of Retirement Benefit Contribution Limits for 2022:
- Elective salary deferral to 401(k)/403(b) – $20,500
- Elective salary deferral to 401(k)/403(b) catch-up contribution (age 50 and older) – $6,500
- Combined employer and employee contribution – $61,000
- Combined employer and employee contribution (including catch-up contribution) – $67,500
- Elective salary deferral to SIMPLE – $14,000
- Elective salary deferral to SIMPLE catch-up contribution (age 50 and older) – $3,000
- IRA – $6,000
- IRA catch-up contribution (age 50 and older) – $1,000
Summary of other Pre-Tax Benefit Contribution Limits for 2022:
- Health Savings Account: self-only coverage – $3,650
- Health Savings Account: family coverage – $7,300
- Health Savings Account: catch-up contribution (age 55 and older) – $1,000
- Employer Health FSA contribution – $2,850
- Employer Dependent Care FSA contribution – $5,000