As financial planners, we obviously adore retirement accounts and saving for the future. What makes these accounts so great are the tax rules associated with contributing money to them. You can either get a tax deduction today (but pay taxes later when you withdraw the money), or you can skip the deduction now and know that the money invested will grow tax free going forward.
The tax benefits are so appealing that there are contribution limits to these various retirement accounts. Every year, the IRS reviews these limits, and financial planners everywhere wait with great anticipation to see whether these limits will increase in the coming year. Well, the numbers for 2022 are out, and some accounts will be getting an increase in 2022. When these limits increase, it’s a good idea to review your paycheck deductions or budget in general and adjust your contributions to ensure you’re maximizing the tax benefits of these accounts. Here’s what you should know about retirement account increases — or lack thereof — in 2022.
401(k) Limits Increase
For many individuals, the best place they have for saving for retirement is through their workplace plan, like a 401(k) or 403(b). A part of what makes these accounts so valuable is that it takes much of the manual effort of making a contribution out of the equation. You simply tell your payroll department how much you want to contribute, and the deduction is taken out of your paycheck automatically without your having to do anything. Often in finance, and life in general, the path of least resistance is the best way to ensure something gets done — like saving for retirement.
Thankfully, starting in 2022, 401(k) contribution limits are increasing by $1,000, from $19,500 annually to $20,500. Those who will be over age 50 by the end of the year will receive an additional catch-up contribution as well. This amount, unfortunately, is staying the same — it is $6,500. Therefore, their maximum contribution is $27,000 in 2022.
IRA Contribution Limits Stay the Same
Other common retirement savings vehicles are the IRA and the Roth IRA. Unlike a 401(k), these contributions have to be made manually and do not come from payroll deductions. This requires a little more effort by the saver, but if you’re eligible to contribute, doing do can be more than worth your while.
For 2022, like 2021, the standard contribution remains the same at $6,000. As is the case with 401(k)s, those over 50 by the end of the year are also allowed an additional catch-up contribution that also remains the same: it is $1,000 ($7,000 total contribution).
Another aspect of IRA accounts, and especially Roth IRAs, that is important is that your adjusted gross income (AGI) determines whether you are able to utilize the tax benefits in the first place. Unlike the contribution limits, the AGI thresholds to make a Roth contribution did increase slightly for next year. In 2022, you are able to make a full Roth contribution if your AGI is below $204,000, if married, and $129,000, if filing single. This is up from $198,000, if married, and $125,000, if single, in 2021.
If your AGI is above $204,000 but below $214,000, if married, you are allowed to make a partial (prorated) Roth contribution. For single filers, a partial contribution is allowed if your AGI is above $129,000 but below $144,000. If your AGI is above those amounts, you are not allowed to make a Roth contribution in 2022.
SEP IRA and SIMPLE IRA Limits Increase
The administration costs of a 401(k) can be prohibitively burdensome for many small businesses. However, the need for these individuals and their employees to save for retirement is no less important. A couple of fantastic lower-cost alternatives are the SEP IRA and SIMPLE IRA. The specificities of these plans and which one may be right for your business go beyond the scope of this article. But if you already have, or are considering starting, one of these retirement plans, the limits have gone up in the 2022 rules.
Maximum SEP contributions will increase by $3,000 — from $58,000 to $61,000. While this increase is nice, it is challenging for many small businesses to meet the maximum because of the way the contribution calculation works. This calculation limits a contribution to 20% of net income from the business; meaning, a business would need to earn $305,000 of net income or more to capitalize on the increased limit. But for those who are able to make the maximum contribution, the increase is a welcome benefit.
SIMPLE IRAs also received a small increase from $13,500 to $14,000 in 2022. Like other retirement accounts, a SIMPLE IRA also allows for a catch-up contribution for those over 50, and sticking with the same trend, this limit did not increase next year. The catch-up remains at $3,000 for a total contribution of $17,000.
HSA Contribution Limits Increase Slightly
One of our absolute favorite retirement savings accounts is none other than the HSA (Health Savings Account). Most retirement accounts offer only two tax benefits: tax deferral and either a tax deduction for contributions going in (but taxed on the way out) or tax-free growth (but no deduction on contributions). However, the HSA allows for a tax deduction on the contributions, tax-deferred growth while in the account, and tax-free withdrawals if the money is used for qualified medical expenses, providing the ever-elusive triple tax benefit! Oh, and did we mention that unlike many other retirement accounts, there is no penalty for withdrawing early (assuming the withdrawal is for qualified medical expenses). Most other retirement accounts require the owner to be over 59 1/2 or have a very specific exception to avoid an early withdrawal penalty.
I can gush for hours about the wonders of the HSA. That’s why I get so excited when HSA contribution limits increase. This is true, even when the limits increase only nominally because the account is that good. Clearly, I’m exhilarating to speak with at dinner parties. If you were fortunate enough to catch me at a party, I would enthusiastically tell you that HSA contributions will increase by $50 for self-only plans and $100 for family plans in 2022. This means the total contribution for self-plans will be $3,650 and $7,300 for family plans next year.
We will also note that catch-up contributions remain the same: $1,000. A big difference with these catch-up contributions from other retirement plans is that you must be 55 or older to participate, not 50.
As many pension plans have faded away, and it has become clear that most individuals cannot survive on Social Security alone, taking control of your own retirement savings has become paramount. Every year, the IRS evaluates contribution limits to these plans and reviews making adjustments. Next year is no different, and many different types of retirement accounts will increase their limits in 2022.
Since these accounts come with tax benefits, it often makes sense to contribute as much as you can to take advantage of them to their fullest extent. If you’re already maxing out a plan and its contribution limits are increasing next year, you should consider adjusting your contributions beginning in 2022. For assistance reviewing your retirement plan and determining whether you’re on track, please reach out to our team.
Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisor.