With inflation on the rise, the IRS increased the 2022 contribution limits for some retirement accounts. Although a 2021 Congressional report found that only about 8.5% of defined benefit plan participants and 4.7% of individual retirement account (IRA) holders max out their contributions each year, increasing the amount you put aside for retirement may help your financial independence.1 Here is what retirement savers need to know about the increases allowed in 2022.
Changes to 401(k) Limits
For 2022, the 401(k) limit for taxpayers under age 50 has increased by $1,000, to $20,500.2 Those age 50 and older may make another $6,500 “catch-up” contribution, for a total maximum contribution of $27,000. This contribution amount is individual, which means that a married couple may contribute a total of $41,000 to their 401(k)s plus $6,500 more for each person who is age 50 or older to a maximum of $54,000.1
Along with 401(k)s, this $20,500 contribution limit also applies to the 403(b), 457, and Thrift Savings plans available to government employees.
No Changes to IRA Limits
Though 401(k) limits increased, the IRS did not increase the contribution limits for traditional IRAs and Roth IRAs. These IRA limits remain the same, $6,000 for those age 49 and under and $7,000 for 50 and older.1
The deductibility of traditional IRA contributions depends on your household income, while your ability to contribute to a Roth IRA also depends on your income. And unlike the IRA contribution limits, these income thresholds have changed for 2022.
- For single taxpayers covered by a 401(k), 457, or another workplace retirement plan, a deduction of up to the $6,000 or $7,000 limit (age 50 or older) is available only if their 2022 income is under $68,000. Those earning between $68,000 and $78,000 may deduct a portion of the full IRA contribution. These income thresholds represent a $2,000 increase from 2021.1
- For married taxpayers filing jointly, who are both covered under a workplace retirement plan, the full IRA deduction is available if the total household income is under $109,000. Those earning between $109,000 and $129,000 may deduct a portion of the full IRA contribution, while those earning more than $129,000 cannot deduct any traditional IRA contributions.1
- For married taxpayers filing jointly, where a workplace retirement plan covers only one, both taxpayers may deduct the full IRA contribution if they earn less than $204,000 in 2022, with the phase-out allowing a partial deduction for earnings between $204,000 to $214,000.1
IRA contributors whose income exceeds these limits may still contribute to a traditional IRA—they just cannot deduct this contribution. But when it comes to Roth IRAs, those whose income exceeds the contribution thresholds are barred from directly contributing to a Roth.
- For single taxpayers or heads of household, the full Roth IRA contribution is available so long as their 2022 income is under $129,000.1
- For married couples who file jointly, the Roth IRA income threshold starts at $204,000; those whose income exceeds $214,000 cannot contribute any amount to their Roth. Married taxpayers whose household income is between $204,000 and $214,000 may contribute a lower amount to a Roth IRA.1
Because over-contributing to an IRA or Roth IRA carries some financial penalties, work with a financial professional to not exceed the maximum allowed. It is important to know these limits and how they increased for the 2022 tax year.
1 https://www.investopedia.com/2022-401k-limit-rises-5208542
2 https://www.fa-mag.com/news/irs-raises-401-k—roth-contribution-limits-64793.html
Important Disclosures:
This material was created for educational and informational purposes only and is not intended as ERISA, tax, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Investing involves risks including possible loss of principal.
Contributions to a traditional IRA may be tax-deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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