The IRS announced that employees will be able to contribute an extra $1,000 to their 401(k) accounts in 2022. The change reflects higher cost-of-living adjustments to retirement accounts but does not affect IRA accounts.
Inflation means you probably should contribute more to your workplace retirement account in 2022.
Basic Limit on Elective Deferrals
- Current retirement plan contribution limits for 401(k)s, 403(b), most 457, and Thrift Savings Plans are $19,500 a year for participants under the age of 50 and $26,000 a year for those 50 and over. The latter includes a catch-up contribution option of up to $6,500 per year.
- In 2022, the $19,500 limit is increasing to $20,500. The $6,500 catch-up limit, however, isn't changing so employees who are age 50 and over will be able to save up to $27,000 into their 401(k) plans.
Data suggests that few taxpayers will take advantage of this increase as just 8.5% of defined contribution plan participants max out their contributions, according to a 2021 Congressional Research Service report.
If you are able to max out your retirement plan contributions in 2022, there are potentially significant tax savings. Traditional 401(k) plans are funded with pre-tax dollars so the more you contribute, the less taxable income you'll make. If you're in a higher tax bracket, the extra $1,000 could make a difference.
Because of compounding interest, the length of time you have additional money in your retirement plan can also make a significant impact.
If you have multiple 401(k) accounts, your total contributions to multiple accounts —both traditional and Roth—cannot exceed the $19,500/$20,500 limit. Contributions that you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.
Employer Contributions
Your employer may incentivize you to participate in a 401(k) plan by matching your contributions by adding, for example, 50 cents or $1 for every dollar that you contribute.
Employers may also make elective contributions. The general limit on total employer and employee contributions for 2020 is $57,000, or 100% of employee compensation (subject to a max of $285,000,) whichever is lower.
For workers age 50 and up, the base limit is $63,500 ($57,000 plus the $6,500 catch-up contribution.)
In 2021, the general limit on total employer and employee contributions is $58,000 and if you are age 50 and up, the base limit is $64,500, which includes the $6,500 catch-up amount. In 2022, these total contribution limits increase to $61,000 and $67,500, respectively.
Here is a handy table from IRS.gov.
COLA Increases for Dollar Limitations on Benefits and Contributions
| IRAs | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
| IRA Contribution Limit | $6,000 | $6,000 | $6,000 | $6,000 |
| IRA Catch-Up Contributions | 1,000 | 1,000 | 1,000 | 1,000 |
| Traditional IRA AGI Deduction Phase-out Starting at | 2022 | 2021 | 2020 | 2019 |
| Joint Return | 109,000 | 105,000 | 104,000 | 103,000 |
| Single or Head of Household | 68,000 | 66,000 | 65,000 | 64,000 |
| SEP | 2022 | 2021 | 2020 | 2019 |
| SEP Minimum Compensation | 650 | 650 | 600 | 600 |
| SEP Maximum Contribution | 61,000 | 58,000 | 57,000 | 56,000 |
| SEP Maximum Compensation | 305,000 | 290,000 | 285,000 | 280,000 |
| SIMPLE Plans | 2022 | 2021 | 2020 | 2019 |
| SIMPLE Maximum Contributions | 14,000 | 13,500 | 13,500 | 13,000 |
| Catch-up Contributions | 3,000 | 3,000 | 3,000 | 3,000 |
| 401(k), 403(b), Profit-Sharing Plans, etc. | 2022 | 2021 | 2020 | 2019 |
| Annual Compensation | 305,000 | 290,000 | 285,000 | 280,000 |
| Elective Deferrals | 20,500 | 19,500 | 19,500 | 19,000 |
| Catch-up Contributions | 6,500 | 6,500 | 6,500 | 6,000 |
| Defined Contribution Limits | 61,000 | 58,000 | 57,000 | 56,000 |
| ESOP Limits |
1,230,000 245,000 |
1,165,000 230,000 |
1,150,000 230,000 |
1,130,000 225,000 |
| Other | 2022 | 2021 | 2020 | 2019 |
| HCE Threshold | 135,000 | 130,000 | 130,000 | 125,000 |
| Defined Benefit Limits | 245,000 | 230,000 | 230,000 | 225,000 |
| Key Employee | 200,000 | 185,000 | 185,000 | 180,000 |
| 457 Elective Deferrals | 20,500 | 19,500 | 19,500 | 19,000 |
| Control Employee (board member or officer) | 120,000 | 115,000 | 115,000 | 110,000 |
| Control Employee (compensation-based) | 245,000 | 235,000 | 230,000 | 225,000 |
| Taxable Wage Base | 147,000 | 142,800 | 137,700 | 132,900 |
Stay tuned because there are more changes expected to come as the IRS announces other tax-related adjustments for 2022, such as updated income tax brackets and how much you’ll be able to deduct as part of the standard deduction in your tax return.
Remember when it comes to retirement savings, it's good to contribute early and often.
Do you plan to increase your 401(k) retirement contributions next year?
