Inflation crept up over the past year, and there is talk that tax rates might be rising too. The good news is that in 2022 you will be able to put more money away in your 401k to help you stay ahead. That's right, the IRS released the contribution and tax-deferral limits for 401k plans, IRAs, and other retirement accounts for 2022. Changes are based on cost of living and with costs rising, there are some notable changes for those saving in 401k accounts.
401k employee contribution limits increase in 2022 to $20,500 from $19,500 in 2021. Like 2021, those over 50 years of age can make additional catch-up contributions of $6,500 per year (that's up to $27,000 per year in total excluding any employer match) to their 401k accounts. Most 401ks allow Roth 401k contributions. Employees may choose to put some, none, or all contributions into the Roth 401k or tax-deferred option. Do know that all employer match or contribution must be provided on tax deferred basis. Separately, IRA limits remain the same as last year.
The Total Amount You Can Defer Into a 401k is Increased to $61,000
Another 401k area of import that changed is the amount you can contribute and receive in total to your 401k account. If you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $58,000 to $61,000 for 2022 with those over 50 years able to put in $67,500 with the catch-up. Here is a summary of the 2022 401k limits as compared to 2021:
|401(k) Limits for 2022|
|Employee contribution limit||$20,500||$19,500|
|Annual limit per individual||$61,000||$58,000|
|Age 50+ catch-up amount||$6,500||$6,500|
|Annual compensation limit||$305,000||$290,000|
|Highly compensated employees||$135,000||$130,000|
401k Saving Advantages Over Traditional IRAs Are Significant
The tax advantages for 401k savers versus those opting to use IRAs or don't have access to a 401k plan is large and is now even a bit bigger.
|401(k) Advantages Over Traditional IRAs in 2022|
|Annual limit per individual||$61,000
(employee + employer contributions)
|Age 50+ catch-up amount||$6,500||$1,000|
|Roth income limit||None||$144K*|
|Penalty-free access, if needed||Yes, via a loan||No|
*Beginning at $129K, the amount you are allowed to contribute begins to decrease, hitting $0 at $144K for singles (range is $204K to $214K for married couples filing joinly)
2022 IRA contributions limits are the same as in 2021; however, income levels to use or get the tax benefits of traditional and Roth IRAs are increased. In other words, you can earn a little more in 2022 and are able to deduct your IRA contributions. The phase out income limits for contributing to a Roth IRA are bumped up $4K to $6K from 2021 depending on your filing status.
Refer to IRS announcement and notice for 2022 for more details.