What Is the 401(k) Limit for 2022?

Author: Siân Killingsworth / 8 Mar 2022 / 401(k) Plan Information

The individual 401(k) limit increases by $1,000 to $20,500 in 2022. Catch up contributions remain the same at $6,500, meaning that you can contribute a total of $27,000 if you’re age 50 or older. The combined total annual 401(k) contribution for employers and employees (or self-employed business owners) increased this year by $3,000 to $61,000 for people under age 50, or $67,500 for people age 50 or older.

Why invest in a 401(k) in 2022?

One of the best features of saving for retirement using a 401(k) account is the tax-deferred contribution. Saving some of your wages before you pay income tax on them this year will reduce the total amount of money you owe Uncle Sam. You will likely also benefit from the growth in interest on those savings, year-over-year.

Why does the 401(k) limit change?

Every autumn, the Internal Revenue Service announces the maximum 401(k) contribution limits for the coming year. Sometimes the amount stays the same but in other years it may increase by $500 or $1,000 to adjust for inflation and changes to the cost of living. With the COVID-19 pandemic still in full swing and a relatively high 5.9% annual inflation rate, it’s not surprising that adjustments have been made to the 401(k) allowance for 2022.

What are catch up contributions?

Many Americans don’t have much saved for retirement, and relying on Social Security will be insufficient for most people’s needs. You may realize you haven’t saved as much money as you’d like or you may wish to retire early. The IRS allows you to put in $6,500 extra into your account each year once you reach the age of 50. This way, you can catch up on contributions you missed in previous years to help you retire more comfortably.

What is the combined employer/employee 401(k) limit in 2022?

The $20,500 contribution limit in 2022 applies to employee contributions only. Most employer plans match some or all employee contributions based on a certain formula. The employer match is free money given to reward those who participate in the plan. Employers choose to contribute to their employee match plans because when more rank-and-file employees participate in the retirement plan, the more business owners, key employees, and highly-compensated employees (HCEs) are permitted to contribute to their own plans.

Based on the rules of IRS nondiscrimination testing, when enough non-HCE employees are plan participants and their contributions are company matched, the total employee/employer limit for 2022 is $61,000 for those under age 50 and $67,500 for those age 50 and older.

How much can you put in a Solo 401(k) in 2022?

The combined employer/employee totals are also relevant to self-employed freelancers, business owners, or solopreneurs who contribute to a Solo 401(k) plan as both employer and employee. In 2022, individuals putting money into a Solo 401(k) may contribute up to the employer/employee maximum of $61,000 (under 50) or $67,500 (age 50 and older).

Spouses may also participate in Solo 401(k)s, allowing married couples a household savings of up to $122,000 (under age 50) or $135,000 (age 50 and older). Plan participants who have reached their maximum contribution limit may consider adding a cash balance plan to double, or even triple, their tax savings.

What is the SIMPLE plan contribution limit in 2022?

SIMPLE 401(k) plans are designed for companies with fewer than 100 employees. The 2022 elective deferral limit is 100% of compensation, or $14,500, a $5,000 increase from 2021. Employees age 50 or older may also make the $6,500 catch up contribution on top of this limit.

Should you max out a 401(k) in 2022?

Not everyone can afford to set aside $20,500 or $61,000 in savings this year. If you are able to take advantage of the 401(k) maximum, the rewards can be great.

For example, imagine you are earning $210,000 and contribute the maximum of $20,500. You will only be taxed on $189,500 of your income, which can take you from the 35% tax bracket down to a 32% tax bracket. Instead of owing the IRS $73,500 in taxes, you will only need to pay $60,640 – a savings of $12,700.

Money contributed to the 401(k) plan compounds with tax-deferred gains, so that $12,700 saved can accrue to quite a large sum over the years.

At minimum, financial advisors recommend reserving 15 percent of your income for retirement or at least contributing enough to qualify for an employer’s match. Depending on your employer’s plan, this could be anywhere from 3% to 6% of your salary.

Contact Ubiquity to learn more about setting up a simple, affordable 401(k) plan for your small business or solo endeavor. We offer all the resources you need to get started and provide administration services for a low, monthly flat fee. You are free to work with your broker of choice to choose investments or we can help you find one through our affiliate network.

It’s not too late to start saving for the upcoming year, as the 2022 401(k) contribution deadlines aren’t until well into 2023. Call us today to enjoy retirement freedom tomorrow.