In November 2021, the IRS announced its latest upcoming changes to a range of widely used retirement plans. Generally, these changes will affect both the contribution ceiling level as well as the income thresholds for those who can participate (as determined by the adjusted gross income “AGI” reported on your federal income tax return).
Adjustments are made periodically by the IRS to keep up with inflation. It’s important to understand these rules as they can determine whether or not you and your spouse will be able to contribute to one or more of these plans. Each year, the more you can utilize these retirement plans, the more money you’ll ultimately save in taxes and build wealth for the future.
Workplace Retirement Plan Contribution Limits Will Increase
Starting in 2022, annual 401k plan contribution limits will increase by $1,000 to $20,500 (up from $19,500). This same increase will also apply to those people who contribute to a 403b, most 457 plans, or the federal government's Thrift Savings Plan.
For people age 50 and older, catch-up contribution limits will stay the same at $6,500. Recall that this is on top of the regular contribution limit, so that means someone who is 50 years old could save as much as $27,000 to their 401k plan.
IRA Contribution Limits Remain the Same
Contribution limits to traditional or Roth IRAs will not change in 2022. The maximum amount you can contribute to one or the other remains at its current annual limit of $6,000 (or $7,000 if you're age 50 and older).
Eligibility to contribute to a tax-deductible IRA or Roth IRA depends on your tax filing status, AGI, and whether or not you or your spouse are covered by a workplace retirement plan. To keep up with the cost of living, the IRS made the following adjustments to the income limits:
To make a tax-deductible contribution to a traditional IRA:
- Single filers covered by a workplace retirement plan: Starts at $68,000 and phases out at $78,000
- Married filing jointly and the spouse contributing is covered by a workplace retirement plan: Starts at $109,000 and phases out at $129,000
- Married filing jointly and the spouse contributing is not covered by a workplace retirement plan: Starts at $204,000 and phases out at $214,000
- Married filing separately and is covered by a workplace retirement plan: Starts at $0 and phases out at $10,000
To contribute to a Roth IRA instead:
- Single filers: Starts at $129,000 and phases out at $144,000
- Married filing jointly: Starts at $204,000 and phases out at $214,000
- Married filing separately: Starts at $0 and phases out at $10,000
Self-Employed Retirement Plan Changes
If you’re self-employed or earn money from a side hustle, then the contribution limits you can make to one of the three available retirement plans will change as follows:
- Solo 401k: $61,000 (up from $58,000). You can also make an additional catch-up contribution of $6,500 if you're age 50 or older.
- SEP IRA: The lesser of 25 percent of the employee's compensation or $61,000 (up from $58,000)
- SIMPLE retirement accounts: $14,000 (up from $13,500)
Should You Make Adjustments to Your Plan?
While these aren’t major increases, we always encourage savers to maximize contributions to their workplace retirement plans and/or IRAs each year. Small increases in savings can have a large impact on your wealth over time. If maximizing contributions is not possible, we recommend starting with your employer-sponsored plan and contributing at least up to the employer match. Then, work with your advisor to determine which accounts to “fill” next in order to diversify your retirement income and minimize your overall lifetime tax burden.
Before you jump into retirement, you’ll want to work with your financial planner to review all of your assets and liabilities, and determine the best plan for your retirement goals. Your planner will assist you in how best to use your current retirement savings and maximize the growth and use of that money.