In the coming year of 2022, employers will look forward to the newly increased 401k contribution limits for their employees. According to the IRS Notice-2021-61, the limits of most defined contributions and defined benefit plans will be increased upwards. This also includes adjustments to 403(b) and 457 defined contribution plans as well as the Thrift Savings Plan.
Every year, the IRS updates these limits to cater to the rising cost of living based on the current cost-of-living adjustments (COLA) so workers can retire comfortably. This serves as a great opportunity for employers to encourage their workers to increase their savings more with the endorsement of the IRS.
Here are changes that both employers and employees should brace for come 2022.
401k Contribution Limits for 2022
The 401k contribution limit will increase from $19,500 in 2021 to $20,500 in 2022. Workers will now stash away an extra $1,000 towards their retirement fund. However, the catch-up contribution limit allowing people aged 50 and older remains at $6,500 annually. Even so, older workers can still revamp their retirement nest up to $27,000 in 2022.
Depending on the plan, employees can make extra after-tax but non-Roth contributions towards a traditional 401k upon exceeding the employee contribution limit of $20,500 or $27,000 for individuals aged 50 years or older, up to $61,000 or $67,500 for age 50 and older. Currently, in 2021, the limits are at $58,000 and $64,500 for those aged 50 years and older.
It’s important to note that the total 401k contribution limit for employers and employees cannot exceed $61,000. The 401k compensation limit is also subject to the COLA and will rise to $305,000 from $290,000 in 2021 as per IRC Section 401(a)(17).
The current limit for profit-sharing 401ks in 2021 is $58,000 for each employee. Usually, business owners can decide to integrate profit-sharing plans into their employees’ retirement ants to manage the contributions as per business profits. With the new updates, employers cannot exceed the limit of $61,000 for profit sharing.
In terms of specifics, for a corporation, the maximum profit sharing contribution is 25% of W-2 gross incomes for employees, while for a sole proprietor, the contribution is 20% of net income, with both being maintained below the $61,000 limit.
A SEP IRA is best suited for self-employed individuals and small business owners who want a less complicated and affordable way to save for retirement. Employers can also set them up for their employees; however, it’s their prerogative to contribute.
The annual contribution limit cannot climb above $58,000 for 2021 and $61,000 for 2022. This also includes the compensation limit, which will rise from $290,000 in 2021 to $305,000 in 2022.
Traditional IRAs and Roth IRAs
The contribution limits for traditional IRAs and Roth IRAs will remain the same at $6,000, which is from 2019, and $1000 catch up for those of age 50 and older. However, the IRS will allow more Americans to participate in Roth IRA contributions. This is following another announcement that the income phase-out ranges will be increased.
For single filers and heads of households, the new ranges will be $129,000 to $144,000. The range for married couples who file jointly is $204,000 to $214,000. In case a married person files separately from their spouse, the range stays at 0-$10,000 and is not under COLA.
For a traditional IRA contributor who is covered by a workplace retirement plan, the AGI phase-out range for singles is $68,000 to $78,000, while for married couples filing jointly it is $109,000 to $129,000. Similarly, for a married couple filing separately and covered by a workplace retirement plan, the range is 0-$10,000 and is not subject to COLA.
Saver’s Credit Income Limit for 2022
This is good for workers who don’t earn a big paycheck but can improve their retirement savings. They will be able to earn between $1,000 and $2,000 more in 2022 and still qualify for saver’s credit. Saver’s credit targets low to middle-income workers who contribute towards a 401k plan or individual retirement account.
The income limits for saver’s credit will increase to $34,000 from $33,000 for individuals and married couples filing separately and $68,000 from $66,000 for married couples filing jointly. As for heads of households, it will be $51,000 up from $49,500.
Simple IRAs Simple IRAs normally include salary reduction contributions plus the employer’s contribution (matching contribution or non-elective contributions). Employees’ contributions from their salary to a SIMPLE IRA will increase from $13,500 in 2021 to $14,000 in 2022. Should the employee participate in more than one plan which has elective salary reductions, they can only reach the maximum of $20,500 in 2022.
When making a matching contribution to the worker, the employer cannot exceed 3% of the employee’s compensation. If the employer chooses to make non-elective contributions, this is 2% of an employee’s compensation, which has been adjusted to $305,000 in 2022. The catch-up contribution remains constant at $3,000 for participants aged 50 years and above.
2022 401k Limits for Highly Compensated Employees The IRS is also placing limits on contributions of Highly Compensated Employees (HCEs) as per non-discrimination testing requirements. The limit will shift from $130,000 to $135,000. In general, an HCE can’t contribute more than 2% of their salary to their 401k than the contribution of a non-highly compensated employee. Otherwise, the company will miss out on the tax advantages.
The Next Step A recent survey by the Gold IRA Guide reveals findings that 48.9% of women have saved less than $25,000 in their retirement accounts, such as 401k, compared to 35.6% of men. The oncoming 2022 adjustments by the IRS show its commitment to help Americans save as much as they can for their future. Here, employers can get more involved to encourage and educate employees on the new changes, such as increased limits to their 401ks. Small business owners can also optimize their retirement savings with the $3,000 boost. Employers should review these new changes to ensure their employees do not miss out on their retirement savings.
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Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President