Tag: 401k

Retirement Plan Contribution Limits for 2022

With only six weeks left in 2021, taxpayers are reviewing their retirement saving opportunities for this year and for 2022. A retirement savings review often comes to mind at year-end and at tax time, since retirement plan contributions are often fully or partially tax deductible, depending on the taxpayer’s circumstances.

Individuals who earn taxable compensation during the year are eligible to contribute to a retirement plan, such as a traditional or Roth Individual Retirement Account (IRA). They can also participate in an employer-provided retirement plan, like a 401(k), 403(b), or the federal government’s Thrift Savings Plan. The tax rules for figuring out the tax savings from retirement plan contributions are complicated, and they apply differently to different taxpayers.

One set of tax rules that applies to all taxpayers is retirement plan contribution limits. Every year, the IRS publishes the dollar contribution limit by retirement plan type. Some years there is no dollar adjustment, but there’s no way to know without checking.

So, what are the 2022 contribution limits for IRAs and most employer-sponsored retirement plans? 

Traditional and Roth IRAs

Total contributions made to all of a taxpayer’s traditional and Roth IRAs for 2022 can’t be more than total taxable compensation for the year, up to $6,000. The limit increases to $7,000 for taxpayers who are age 50 or older, to help those taxpayers who have a shorter time frame until retirement and need to “catch-up” on contributions to fund their future income needs.

Employer-Sponsored Plans

Employer-sponsored plans, like a 401(k) or a 403(b), are types of qualified profit sharing plan that allow employees to contribute a portion of their wages pre-tax to an individual account. The employee contribution limit increased for 2022, up from $19,500 to $20,500. The employer may also contribute to employees’ accounts; however, employer contributions do not impact employee contribution limits.

Tax rules for figuring out the tax savings from retirement plan contributions are complicated, and they apply differently to different taxpayers. Plus, the contribution limits are different based on the retirement plan type. Contribution dollar limits are subject to change every year. Tax savings depends on each taxpayer’s circumstances. 

Want more details about retirement plan options, contribution limits and tax savings? The IRS has it all at https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans.

New Rules for IRAs

A few weeks ago, I blogged about the IRS rules for Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Well, throw that one out. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “Secure Act”) was signed into law. The Secure Act changed several important aspects of IRA distributions and contributions.

One thing hasn’t changed. The new tax law still doesn’t allow untaxed retirement money to remain untaxed indefinitely. RMDs, inherited IRAs and other distribution rules are intended to make sure that Uncle Sam gets his share of taxpayers’ pre-tax retirement savings. The Secure Act changes the timing of when Uncle Sam gets his share.

Here are three major changes from the Secure Act that should you know, even if you aren’t close to retirement age:

  • Required Minimum Distribution (RMD) Age Increase

Under prior tax law, RMDs had to begin no later than April 1 following the year in which a person turned age 70½. For taxpayers who were not already age 70½ by December 31, 2019, the age to start taking RMDs is extended to 72. Distributions don’t have to be postponed to 72; it’s just an option. What’s better – waiting or not – depends on individual circumstances.

  • Contribution Age Restrictions Repealed 

Before the Secure Act, workers over age 70½ were not eligible to make contributions to an IRA. That contribution age limit has been eliminated. Yea! Slight damper on that celebration, though – the same rules about who can and cannot deduct a traditional IRA contribution apply, regardless of age. 

  • Inherited IRA “Stretch Distributions” Eliminated for Non-Spouses

Traditional IRAs that are inherited by someone other than the owner’s spouse can no longer be distributed over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This new rule eliminates the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.

Tax rules are always changing. The December 2019 Secure Act changed several rules about taking distributions from traditional IRAs, 401(k) plans and other pre-tax retirement plans. Sure¸ taxpayers still can’t allow untaxed retirement money to remain untaxed indefinitely. Conversely, the repeal of the age limit on IRA contributions and other changes could positively impact how retirement distributions are taxed.

Need help figuring out the new rules? Get detailed tax advice that fits your situation from a qualified tax professional. You can find one near you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.