Everybody wants to enjoy a peaceful, worry-free retirement one day. But if you don’t plan for the future now, it may be much more difficult to do so later. 401(k) plans are a great tool individuals can use to save for retirement. It offers many great benefits, on top of being a solid savings fund, and many employees seek out jobs almost solely for benefits like a 401(k).
But with the new year bringing a new tax season, it may be time to review your plan and contributions to meet the new limits for 2022.
What is a 401(k)?
A 401(k) is a vital part of any employee’s retirement. It is a specialized kind of savings and investment plan that employers offer their employees in order to help them set aside money for their eventual retirements. Both employees and employers can contribute to the employee’s 401(k), and there are great benefits available to both for doing so. Namely, the employee gets a solid retirement fund, the employer gets a lower employee turnover rate and a top-talent candidate pool for their jobs, and both receive substantial tax breaks on any money contributed.
401(k)’s provide individuals with many wonderful benefits, including substantial tax breaks on all money that is contributed to the account. However, because these tax breaks are so significant, the Internal Revenue Service (IRS) imposes contribution limits on 401(k) plans to promote the economy through the taxation of any money that exceeds the limit. In fact, the IRS has systems in place that penalize individuals for contributing above those limits. The most notable penalty is that your additional contributions will be taxed an extra six percent.
To ensure you don’t over-contribute and face that tax increase, let’s take a closer look at the contribution limits for 2022.
2022 401(k) Contribution Limits
As usual, most 401(k) contributions and income changes will increase in 2022 as a result of inflation. However, not all of these limits will be subject to change. To better understand your contribution options moving forward, let’s take a closer look at a few key contribution plans.
Employee Elective Deferral
The overall maximum employee elective deferral for 2022 has increased by $1,000 to a total of a $20,500 limit for 2022. This specifically applies to those employees who are under the age of fifty. For those contributors over the age of fifty, the maximum employee elective deferral, plus catch-up, contribution amount has also risen by $1,000 to max out at $27,000. However, despite this overall increase, the employee catch-up fund for those employees who will be over the age of fifty by the end of 2022 has seen no change this year. It remains fixed at $6,500.
Defined Maximum Limits
Defined contribution maximum limits for both employees under and over fifty have seen big increases. For those under fifty, their employer and employee combined limit has increased by $3,000 to $61,000 total. Similarly, for those fifty and above, all of their sources, plus their catch-up, have increased by $3,000 to cap out at $67,500.
Other Compensation Limits
2022 has seen greater increases for both employee compensation limits and key employees’ compensation threshold for top-heavy plan testing–including the officers of the company who sponsors the 401(k) plan. Each of these limits has grown by $15,000 raising the employee compensation limit for calculating contributions to $305,000 and the compensation threshold to $200,000.
Additionally, those employees who are classified as highly compensated, or those who earned more than $135,000 in 2021, have seen an increase in their threshold for nondiscrimination testing that is limited to $135,000, a $5,000 increase from 2021.
Income Phase-Out Limits
While individuals not covered by retirement plans at work are eligible for full contribution deductions, the same may not be true for those who are. In fact, traditional IRAs and Roth IRAs both have specific phase-out ranges that employees must comply with to be eligible for workplace retirement plans.
Traditional IRA Income Phase-Out Ranges
For 2022, single taxpayers who are covered by a workplace retirement plan range at $68,000-$78,000 while married couples filing jointly can range from $109,000-$129,000. Employees who are not covered themselves but are married to covered individuals range at $204,000-$214,000, and those who are married but filing separately range from $0-$10,000.
Roth IRA Income Phase-Out Ranges
In 2022, single taxpayers who are both covered and heads of their households will have a range from $129,000-$144,000. Those who are married and filing jointly will receive a range of $204,000-$214,000, and those who file separately will range at $0-$10,000.
Employee Benefits Made Easy
At Beckham Insurance Group, our knowledgeable and experienced employee benefits representatives are here to help make your benefits administration as easy and stress-free as possible. Contact us today to learn more about how we can help you build a competitive and comprehensive benefits program.