The new year is right around the corner, and with that comes changes to retirement plans. Many Americans will welcome the 2022 increase in contribution limits allowing them to contribute even more to their savings. There are also a few things to note if you dipped into your retirement account for emergency funds last year.
Increased 2022 401(k) contribution limits
Along with the talk of inflation comes some positive news for contributors to 401(k) retirement accounts. The Treasury Department has announced adjusted contribution limits for workplace savings accounts. Basic salary deferral for 401(k)s and similar workplace plans will see a $1,000 increase, bringing the 2022 yearly contribution limit to $20,500. The overall contribution limit to include employer contributions will increase by $3,000, for a total of $61,000 for 2022. The catch-up amount for those 50 and older remains the same at $6,500, making the total possible contribution $67,500.
Good news for self-employed individuals and small business owners: contribution limits for SEP IRAs and solo 401(k) plans have also increased by $3,000 to $61,000 for 2022.
Changes to IRAs in 2022
There will be no increase in contribution limits for IRAs in 2022; IRA contribution limits have been at $6,000 annually, with a $1,000 catch-up if you’re 50 or older, for the past four years. However, you can deduct your IRA contributions, and the phaseout income limits for 2022 are increasing, allowing you to earn more while still contributing to an IRA. If your income puts you over the limits for an IRA, you can open a nondeductible IRA and convert it to a Roth IRA immediately. As a bonus, Congress removed income restrictions for Roth IRA conversions, allowing taxpayers to take a backdoor approach and offering incredible benefits to even more people.
Additional changes for 2022
Below are some additional updates for retirement savings in 2022:
- Aftertax 401(k) contributions will get you the advantage of the new $61,000 limit for 2022
- Simple retirement account contribution limits increase from $13,500 to $14,000 in 2022
- Limitations on the defined benefit plan increase from $230,000 in 2021 to $245,000 in 2022
- The income limit to qualify for the saver’s credit will increase for 2022. Married couples filing jointly will increase by $2,000; heads of household will increase by $1,500; and singles and married filing separately will increase by $1,000.
Keep in mind, you can update your elections at any time during the year. If you received a bonus or raise, or are finding more room in the budget, consider whether you can increase your contributions while remaining within the allowable limits. Not only will this get you on track for a comfortable retirement, but it can also offer tax incentives.
What to do if you borrowed from your retirement during an emergency
If you’ve ever had to borrow from your retirement account during an emergency (such as the pandemic), you’re not alone. In most cases, we highly advise against withdrawing early from your retirement savings, but sometimes there are no other options. The important thing is to return the money as soon as possible to avoid penalties.
The IRS gave taxpayers who were affected by COVID a break if they had to take distributions under the age of 59 ½. Penalties were waived for those who withdrew up to $100,000 from an IRA, 401(k), or similar account. This might not be the case for future events, or other individual life events, such as a health emergency, loss of a job, or other situations. Even so, if you did take a loan from your retirement account during the pandemic and have since recovered financially, it’s important to get back on track with your savings when possible. If you dipped into your retirement savings due to losing a job and are now working again, consider whether you can increase contributions through your employer’s plan.
If you’re struggling to find ways to refund your depleted retirement account or can’t manage to get on track, send us a message. We would be honored to sit down with you and evaluate your income, debt, and savings, putting together a plan to help you reach the retirement of your dreams.