Inflation means you can—and probably should—contribute more to your workplace retirement account in 2022.
The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2022. While contribution limits are up for workplace plans, contribution limits for Individual Retirement Accounts are stuck at 2019 levels.
“The real question is whether people pay attention to this,” says Terry Briggs, an employee benefits lawyer with Bowditch & Dewey in Worcester, Massachusetts. “To the extent you can afford it, you should contribute to the max.” That’s true for older workers trying to catch up with retirement savings. But it’s also true for younger workers. “It’s the length of time you have this money in your retirement plan before you take it out that’s important. Compounding interest really makes a difference,” Briggs says.
The basic salary deferral amount for 401(k) and similar workplace plans will jump $1,000 to $20,500, and the catch-up amount if you’re 50 or older stays flat at $6,500. The overall limit, which includes employer contributions, goes up $3,000—from $58,000 in 2021 to $61,000 in 2022. With catchups on top, that comes to $67,500. That helps workers whose employers allow special aftertax salary deferrals, and self-employed folks who can save to the limit in solo or individual 401(k)s or SEP retirement plans.
Meanwhile IRA contribution limits are flat. The amount you can contribute to an IRA stays the same for 2022 for the fourth year in a row: $6,000, with a $1,000 catch-up limit if you’re 50 or older.
There’s a little good news for IRA savers. You can earn a little more and get to deduct your IRA contributions. Plus, the phaseout income limits for contributing to a Roth IRA are bumped up.
And the income limits to claim the saver’s credit, an extra incentive to start and keep saving, has gone up.
We outline the numbers below; see IRS Notice 2021-61 for technical guidance. There’s one big caveat: In the November 3 draft of the $1.85 trillion Build Back Better Act, Congress has proposed curbs on contributions and accelerated distributions for high-balance retirement accounts, as well as the elimination of popular wealth-building strategies, including backdoor Roth IRAs and aftertax 401(k) contributions. See House Democrats Once Again Target Biggest Retirement Accounts.
In the meantime, without those changes, here’s the scoop on 2022:
401(k)s. The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $20,500 for 2022—a welcome increase after two years at $19,500. Note, you can make changes to your 401(k) election at any time during the year, not just during open enrollment season when most employers send you a reminder to update your elections for the next plan year.
The 401(k) Catchup. The catch-up contribution limit for employees age 50 or older in these plans remains steady: it’s $6,500 for 2022. Even if you don’t turn 50 until December 31, 2022, you can make the additional $6,500 catch-up contribution for the year.
SEP IRAs and Solo 401(k)s. For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $58,000 in 2021 to $61,000 in 2022. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation also goes up from $290,000 in 2021 to $305,000 in 2022.
Aftertax 401(k) contributions. If your employer allows aftertax contributions to your 401(k), you also get the advantage of the new $61,000 limit for 2022. It’s an overall cap, including your $20,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions—but not catch-up contributions, which can be saved on top.
The SIMPLE. The contribution limit for Simple retirement accounts jumps from $13,500 in 2021 to $14,000 in 2022. The Simple catch-up limit is still $3,000.
Defined Benefit Plans. The limitation on the annual benefit of a defined benefit plan rises from $230,000 in 2021 to $245,000 in 2022. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.
Individual Retirement Accounts. The limit on annual contributions to an Individual Retirement Account (pretax or Roth or a combination) remains at $6,000 for 2022. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000. (Remember that 2021 IRA contributions can be made until April 15, 2022, and 2022 IRA contributions can be made until April 15, 2023.)
Deductible IRA Phaseouts. You can earn a little more in 2022 and get to deduct your contributions to a traditional pretax IRA. Note: Even if you earn too much to get a deduction for contributing to an IRA, you can still contribute—it’s just nondeductible.
In 2022, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $68,000 and $78,000, up from $66,000 and $76,000 in 2021. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range is from $109,000 to $129,000 for 2022, up from $105,000 to $125,000 in 2021.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $204,000 and $214,000 in 2022, up from $198,000 and $208,000 in 2021.
Roth IRA Phaseouts. The inflation adjustment helps Roth IRA savers too. In 2022, the AGI phaseout range for taxpayers making contributions to a Roth IRA is from $204,000 to $214,000 for married couples filing jointly, up from $198,000 to $208,000 in 2021. For singles and heads of household, the income phaseout range is $129,000 to $144,000 in 2022, up from $125,000 to $140,000 in 2021.
If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions. To learn more about the backdoor Roth, see Congress Blesses Roth IRAs For Everyone, Even The Well-Paid.
Saver’s Credit. The income limit for the saver’s credit for low- and moderate-income workers is $68,000 for married couples filing jointly for 2022, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married filing separately, up from $33,000.
QLACs. The dollar limit on the amount of your IRA or 401(k) you can invest in a qualified longevity annuity contract is $145,000 for 2022, up from $135,000 in 2021.
Further Reading:
House Democrats Once Again Target Biggest Retirement Accounts