Starting the new year off with a strong, strategic financial plan to kickstart your financial goals for the next 12 months can have a lasting impact on your future beyond 2022. This, of course, includes the ever-important consideration of retirement planning. Luckily, recent legislative changes have increased contribution limits for the 401(k), as well as altered some other retirement investment vehicles to enable increased savings for those who are eligible. Here’s what you need to know about retirement investing as you conduct financial planning for 2022.
New Legislative Changes To Retirement Investments
As of early November, the IRS announced a number of new legislative changes to retirement accounts that take effect this year, much of which can be attributed to the country’s record-high inflation. This includes changes to contribution limits for 401(k) plans, as well as changes in salary eligibility for IRAs, Roth IRAs and Saver’s Credits, all up from the 2021 plan. Certain contribution limits for IRAs and their associated catch-up values have not changed.
The increase in contribution limits for 401(k) plans is the most notable change from the legislation. The 2021 limit of $19,500 has changed to $20,500 in the new year for normal taxpayers; likewise, the catch-up limit has not increased for taxpayers over 50, with the same increase of only $1,000 from $26,000 in 2021 to $27,000. While this affects a relatively small group of people who max out their retirement savings, it’s still an important tool for investors.
There is no change to the IRA contribution limit, which remains at $6,000 for normal taxpayers and $7,000 for taxpayers over 50. However, the income brackets for traditional IRAs, Roth IRAs and Saver’s Credits have increased slightly, giving additional taxpayers the opportunity to contribute more to these retirement accounts. For example, the bracket phase-out for married couples filing jointly increased from $198,000-$208,000 in 2021 up to $204,000-$214,000 in 2022, giving a bit more room for investment.
Understanding Investment Limits
These legislative changes are important to understand for the sake of understanding your personal investment limits. Essentially, there are two ways to treat investment limits, either as constraints or as opportunities. Relative to acting as constraints, exceeding your contribution limit results in an excess tax. Specifically, excess contributions will be taxed at 6% per year as long as they remain in the account. Therefore, avoiding over-contribution is important to maximize your investments.
On the other hand, the contribution limits are important to know as they are an opportunity to maximize your retirement potential. Specific to 401(k)s and other employer accounts, many of these contributions may carry a match opportunity, meaning that your employer will match your contributions up to a certain amount. It’s important to understand this in order to best take advantage of it and maximize your retirement savings. While this is one efficient way to boost your 401(k), there are other great ways to do this too.
How To Max Out Your 401(K) In 2022
As previously mentioned, one of the most important things you can do to max out your 401(k) contribution is to make the most of your own income and employer inputs.
First, leverage your contributions for the tax breaks. Since contributions are non-taxable income until withdrawn, they are valuable for saving additional money. This is likely to result in net savings, given the fact that your retirement income will likely be lower than your current income.
Another great way to do this is to set automatic contributions for your 401(k). This means that you don’t even have to think about your savings when your monthly paycheck hits. Calculate what your monthly contribution needs to be to max out your annual 401(k) investment and begin with whatever amount you can afford. Each year, you should aim to raise your automatic contribution by 1%, which is an amount that you won’t notice missing from your paycheck but will make a big difference in your retirement fund.
Then, try and divert any funds such as bonuses or incentives, into the fund as well. The more that you can leverage your automatic contributions, the easier it will be to maximize your 401(k).
Finally, ensure that you are in a position to actually take advantage of the employer match. Many employment agreements require that employees remain at the company for a certain amount of time until the employee match vests. While a 401(k) investment is always imperative, committing to the company until vesting occurs will help you maximize your contributions.
The 401(k) is a fantastic vehicle for preparing for retirement, and the new legislative changes relative to these accounts provide more opportunity and flexibility than ever to maximize your savings this year. If you have a 401(k) available to you, particularly with employee match opportunities, there’s never been a better time to prioritize this as the foundation of your retirement savings plan. With a fresh start in the new year, plan to the make the most of 2022 by strategizing a strong retirement savings plan early, and executing it throughout the year.
Brian Menickella is a co-founder and managing partner at The Beacon Group of Companies, a broad-based financial services firm based in King of Prussia, PA.
Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.
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