The IRS recently released its 2022 cost-of-living adjustments for retirement savers. Among the highlights are higher annual contribution limits to 401(k), 403(b), most 457 plans and SIMPLE IRAs as well as high income limits for individuals to qualify for deductible contributions to traditional IRAs.
The maximum amount individuals may contribute in 2022 to employer-sponsored 401(k), 403(b), and most 457 plans via salary deferral increases to $20,500, up for $19,500 in 2021. Catch-up contributions for employees age 50 and older remain unchanged at $6,500, allowing those individuals to contribute as much as $27,000 to their qualifying plans in 2022.
While employees generally have until Dec. 31, 2021, to make their 2021 401(k) contributions, businesses owners with Schedule C income have until their 2021 extended tax filing deadlines to deposit the deferred salary into their accounts and make an employer match.
Businesses and self-employed taxpayers with solo 401(k)s may contribute up to $61,000 to those plans in 2022, up from $58,000 in 2021. This limit includes taxpayers’ elective salary deferrals and the profit-sharing contributions made by their businesses. The $61,000 contribution limit also applies to SEP IRA plans.
Contributions to SIMPLE retirement accounts (also known as SIMPLE IRAs) also increase in 2022 to $14,000, from $13,500 in 2021.
Two additional changes that impact the operations of employer-sponsored retirement plans in 2022 include the definition of highly compensated employees and the annual compensation limit. For 2022, the definition of a highly compensated employee is one who earned more than $135,000 in the prior year (2021). In addition, the maximum annual compensation that can be considered for plan contributions increases to $305,000, up from $290,000 in 2021. This compensation limit change is important as it impacts most employer matching contribution calculations.
For 2022, the maximum amount taxpayers can contribute to an IRA or Roth IRA remains at $6,000, plus an additional $1,000 for qualifying savers age 50 and older.
What has changed are the income ranges taxpayers must use to determine their eligibility for claiming tax deductions. The amount of a deduction may be reduced based on a taxpayer’s access to a retirement plan through his or her employer or a spouse’s employer as well as his or her filing status and modified adjusted gross income (AGI).
The income phase-out range for taxpayers making contributions to Roth IRAs also increase in 2022 from $129,000 to $144,000 for singles and heads of household and $198,000 to $208,000 for married couples filing jointly. For married couples filing jointly, the income phase-out range increases in 2022 from $204,000 to $214,000. Taxpayers whose income exceeds these thresholds may still have an opportunity to realize the Roth IRA benefits of tax-free distributions after reaching age 59½ when they contribute to a traditional IRA this year and later convert that account to a Roth IRA and hold it for a minimum of five years. Although this “back-door IRA” is legal under current tax laws, it is subject to change based on future legislation and modifications to the tax code.
Taxpayers must complete their IRA contributions by the April 15th tax-filing deadline for the tax year of the contribution. Therefore, contributions intended for the 2021 tax year must be made by April 15, 2022, barring any postponements to the filing deadline. This additional time allows individuals to assess their tax liabilities at the end of the year and determine whether it is more beneficial to claim the deduction for that year by contributing to a traditional IRA or paying taxes now on contributions to a Roth IRA, for which future withdrawals in retirement will be tax free.
About the Author: Sean Deviney is a CFP®* professional, a retirement plan advisor and a director with Provenance Wealth Advisors (PWA), an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors + CPAs. For more information, call (954) 712-8888 or email info@provwealth.com.
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Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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Posted December 15, 2021