As we cruise through the final quarter of 2021 and look forward to the holidays, we find that the IRS has given investors an early gift with their recent announcement of higher retirement plan contribution limits beginning next year. For tax year 2022, annual employee contribution limits for 401(k) plans, 403(b) plans, most 457 plans and Thrift Savings plans will rise to $20,500 which is an increase of $1,000 from current contribution limits. “Catch-up” contributions, for those age 50 and up, will remain unchanged at $6,500, putting the maximum standard employee contribution at $27,000.
For smaller businesses that offer their employees a SIMPLE-IRA retirement plan, annual contribution limits will increase by $500 to $14,000. Catch-up contributions for SIMPLE IRA participants remain unchanged at $3,000 per year.
On the downside, individual savers using IRAs will not be seeing an increase in contribution limits as the 2022 annual contribution limit for IRAs remains at $6,000. Catch-up contributions for IRAs remain at $1,000, thus the overall maximum for IRAs for investors age 50+ remains at $7,000.
Diving deeper into the tax code and looking at a subject that is often ambiguous for investors, the potential deductibility of Traditional IRA contributions is also seeing changes as follows:
Partial deductions are available to:
- Single tax filers who earn between $68,000 and $78,000, up $2,000 from 2021.
- Married couples filing jointly earning $109,000 to $129,000, up $4,000 from 2021.
- Those not covered by a workplace plan but whose spouses are — the so-called spousal IRA—and jointly earn $204,000 to $214,000, up $6,000 from 2021.
- Full deductions are available to anyone in the circumstances above who makes less than the ranges provided.
Looking at Roth IRAs next, while not everyone is eligible to contribute to a Roth IRA, more investors may be able to in 2022 as follows:
- Partial contributions are allowed for single filers and heads of households whose income is $129,000 to $144,000. That’s up $4,000 from 2021.
- The partial contribution range for married couples filing jointly jumped by $6,000, to $204,000 to $214,000.
- Anyone with annual income below the lower end of these ranges can make a full annual contribution to a Roth IRA—and anyone with annual income higher than the upper end of these ranges cannot make any contributions to a Roth IRA.
The rules surrounding the oft-overlooked “Saver’s Credit” have also been adjusted. This benefit is helpful for lower-income retirement savers by allowing them a credit on their taxes for part of their retirement contributions. The income limit for married couples filing jointly rose $2,000 to $68,000, $1,500 for heads of households to $51,000, and $1,000 for singles and married people filing separately to $34,000. The Saver’s Credit payment structure itself, however, remains the same.
Let’s move from the facts of the changes to the action steps of how this can help you, the investor, in the long run. First of all, if you are not currently contributing the maximum amount to your company retirement plan and/or personal IRA, then go ahead and consider increasing your contributions! This is by far the easiest and most effective way to enhance your retirement lifestyle. If your cash flow or budget is tight, then consider, at the very least, contributing 1% more to your plan than you contribute now. I have recommended this to many clients over the years and without fail they have thanked me down the road as they realized exactly how easy it was to nudge 1% more per year and how the power of time and compounding returns helped benefit their retirement plan balances over the years that followed.
Next, review your retirement plan allocation to ensure that the investment components you are using are high quality and properly in balance. If you are a DIYer and comfortable reviewing the retirement plan menu, then by all means have at it, but if you are seeking guidance then work with your company’s retirement plan sponsor or your personal financial advisor accordingly. If you are not confident in your company’s retirement plan sponsor, then consider speaking with your company’s HR or benefits plan coordinator to seek more information and potentially institute a better plan.
Finally, if you are in the fortunate position of having substantial excess cash flow such that you can maximize not only your retirement plans, but also a personal investment portfolio, make sure that you are “locating” your investment assets appropriately. Some investment vehicles, such as tax-free municipal bonds, typically should not be held in tax-sheltered retirement accounts for obvious reasons, whereas a high-dividend paying stock would be an ideal choice for a tax-sheltered plan structure.
Back to the main point of this message: Save, save and save some more, and make sure to take full advantage of the increased retirement plan contribution limits. I’ve met many clients who said, “I wish I had saved more earlier on,” but I have NEVER met a client who said, “I have too much money in retirement.”
If you’re looking for guidance or assistance as you plan for retirement, the advisors at Girard are here to help. Contact us to have a conversation.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.