Tag: contribution

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.

Want to Save for Retirement Tax-Free?

If you are thinking about skipping a 2016 IRA contribution because it’s not tax deductible – Think Again! Contributing to a non-deductible traditional or Roth IRA means growth that is never taxed. The earlier you begin investing in an IRA the longer you receive the benefit of tax-free growth.

 

Three common questions about IRAs:

 

How Much Can I Contribute?

Your maximum contribution amount for 2016 is $5,500 and an additional $1,000 for ages 50 or above. The contribution amount is based on filing status and modified adjusted gross income. For example, in 2016 a single taxpayer can make the maximum contribution up to a modified adjusted gross income amount of $117,000. Contributions are reduced the higher the income. In addition, don’t forget about checking with your employer to see if you can contribute any more into your employer- sponsored §401(k) plan, §403(b) plan or §457(b) plan before the year ends.

 

Can I Convert a Traditional IRA to a Roth?

If your income decreases and you fall into a lower bracket you could consider “converting” nondeductible traditional IRA funds into a Roth IRA and pay less tax in the year of conversion. You could pay less tax on the growth or perhaps no tax if your income has really dipped in a particular year or years. The conversion can be done in pieces and is not an all or nothing approach.

 

What About Distributions?

When you do start taking distributions on your IRA after age 59½, only some of it will be taxed and some will be a tax-free return of your investment. Distributions taken before age 59½ are subject to a 10% early withdrawal penalty.

 

These plans allow tax deferral and permit tax savings in the current year with the growth deferred into another period when distributions are received. For issues and questions dealing with a Roth IRA, nondeductible IRA and employer sponsored plans, contact me for more details.

Are Those Year-end Donations Deductible?

This late in the year, you might think it’s too late to lower your 2016 tax bill. Maybe not!

 

Lower your taxes and warm your heart at the same time by making charitable contributions before year-end. Taxpayers may be able to deduct contributions to qualified charities. How do you know that a charity is qualified and your donation is deductible?

 

Answers to three common questions determine whether a donation is tax deductible:

 

Is the Charity Qualified?

 

Only donations to qualified charities with an IRS exemption designation are tax deductible. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted in the IRS’ “Exempt Organizations Select Check” tool at http://bit.ly/1g0xhkc.

 

Who Can Take a Deduction?

 

Charitable donations are only deductible for taxpayers who itemize their deductions using IRS Schedule A. Donations must be acknowledged in writing by the charity. Donations of $250 or more must be supported by a letter from the charity stating the date and amount of the donation, reduced by the value of anything in received by the donor in return, such as a fundraising dinner.

 

What about Non-Cash Donations?

 

Donations don’t have to be financial. Items such as clothing, household goods, vehicles, stock, or real estate, can also be donated. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction per items is based on the “thrift shop” value. Donated vehicles valued at more than $500 and donated property valued at over $5,000 are subject to more rules and limits.

 

Space limits the information presented here. Need more details? Consult a qualified tax professional or check out IRS Publication 526, Charitable Contributions, at http://bit.ly/1ep31yt.