2022 401(k) Catch Up Contribution Rules

Author: Siân Killingsworth / 18 Apr 2022 / 401(k) Plan Information

If you’re turning 50 years old in 2022, you can put an additional $6,500 into a Solo 401(k) or small business 401(k) plan. Reaching this important retirement savings milestone not only saves you more than $1,000 on your tax bill, but earns you investment returns and compounding interest, all tax-shielded.

While the 401k catch up contribution in 2022 has not changed from 2021, maximum 401(k) contributions increased $1,000 to $20,500 this year. That means, including your catch up contribution, your 2022 401(k) savings limit will be $27,000.

Are 401(k) Catch Up Contributions Increasing in 2022?

The answer is NO — the 401k catch up contribution limits for 2022 will remain the same. Since 2020 through the present, $6,500 in catch up contributions are allowed.

What Is the Maximum 401k Catch Up Contribution for 2022?

You can begin making catch up contributions on January 1st the year you turn 50. The max 401(k) catch up contribution for 2022 is $6,500.

To take full advantage of your 401(k) savings vehicle and hit that $27,000 goal for 2022, you’ll need to reserve $519.23/week or $2,250/month. Even if you are not able to hit this target, saving at least enough to obtain your employer’s 401(k) match is an excellent start.

How Much Can You Save in a SIMPLE 401(k) With a Catch Up Contribution for 2022?

SIMPLE 401(k)s for small businesses with fewer than 100 employees can be easy to administer and are not subject to annual nondiscrimination testing, though employers must contribute and fully vest employees in the plan.

If you are 50 or older with one of these plans, you can save an extra $3,000 in catch up contributions – a figure that has remained the same since 2015. For 2022, the maximum limit for a SIMPLE 401(k) is $14,000 – meaning those aged 50 and older can save up to $17,000, including the catch up.

Are Employer 401(k) Contributions Rising in 2022?

Most employers contribute to employee retirement savings. This allows business owners and key employees to contribute more to their own savings accounts, so it’s a win-win for everyone. On top of the $20,500 employees can potentially contribute to their accounts, employers can also put in an extra $40,500 for themselves, bringing the total to $61,000 in 2022. Of course, the exact amount depends upon the employer’s match formula or nonelective contribution rate. This ceiling increased by $3,000 from 2021.

For those age 50 or older making the additional $6,500 catch up contribution, the maximum combined employer/employee 401(k) contribution for 2022 is $67,500.

How Much Can Solo 401(k) Savers Put Away for Retirement?

When you’re age 50 or older with a Solo 401(k), you can contribute to the $67,500 2022 maximum as you are both employer and employee. Best of all, your spouse can also contribute to the plan, effectively doubling your tax savings for the year to a max of $135,000 if you’re both over 50. Of course, people under 50 still enjoy these tax advantages, too – just less the $6,500/person catch up contributions.

When Are Taxes Due on 2022 Retirement Savings?

Households can deduct their 401(k) contributions from their taxable income for 2022 and pay taxes upon 401(k) withdrawal in retirement. Currently, the 401(k) distribution rules do not require you to remove money from your account as Required Minimum Distributions until you are 72 years of age. While you can opt to withdraw money as early as age 55 in some cases, the longer your cash sits, the more profits and compounding interest you earn.

Do Roth 401(k)s Allow Catch Up Contributions?

YES, a Roth 401(k) allows you the same $6,500 catch up contribution. While you won’t get the immediate tax break that a Traditional 401(k) plan provides, you also don’t have to pay tax on the investment growth of that extra $6,500/year.

You’re free to withdraw this money — without tax or penalty — once you are 59 ½ years old and you’ve been contributing to the account for at least five years. Qualified withdrawals can also be taken if you become disabled or you pass away and leave the money to beneficiaries.

What Types of Retirement Accounts Allow Catch-Up Contributions?

In addition to 401(k) accounts, you may also contribute catch up amounts to:

• 403b
• Governmental 457b
• Roth IRAs
• SARSEP
• SIMPLE IRAs

Should You Make the 401(k) Catch-Up Contribution in 2022?

Setting aside $6,500 today doesn’t equate to $6,500 retirement. By the time you need the money, it will be worth so much more. Even if you haven’t saved aggressively up to this point, the catch up contribution is designed to help get you where you need to be in a relatively short period of time. Here’s how a 401(k) catch up scenario might work.

• You and your spouse earn $130,000/year, which puts your household in the 22% tax bracket. You each save the standard $20,500 plus $6,500 in catch up contributions. Ordinarily, you’d owe $28,600 in taxes
• If you save the maximum for your 401(k)s, you’ll be paying taxes on $76,000 worth of income – bringing you down to the 12% tax bracket and decreasing your tax burden to $9,120 (-$19,480)
• The catch up contributions alone produce a $1,430 tax discount
• You can also put away up to $14,000 into a Roth IRA at a 12% rate, paying just $1,680 in taxes
• All told, you can save $1 million by full retirement age this way

Had you opted out of the catch up contributions, you could have amassed over $50,000 in lost savings once investment returns are factored in. The impact is even more significant at higher tax brackets.

So, the answer to “Is the catch up contribution worth it?” is a resounding YES!

How Can You Set Up a 401(k) and Start Making Catch-Up Contributions?

Thanks to catch up contributions, it’s never too late to start saving for your future. If you want to set up a new solo or small business 401(k) account to enjoy all the benefits of tax-advantaged savings — including catch up contributions — the 401(k) contribution deadlines generally go as late as December 31st, 2022, with contributions allowed until next year’s tax deadline.

Contact Ubiquity to learn more about plan setup and administration for a flat transparent monthly rate with no AUM or per-person fees.