IRS Announces Key Updates to 401(k) & IRA Contribution Limits for 2022
On November 4, 2021, the IRS announced key updates to retirement plan contribution limits and income ranges for 2022, including both limit and income increases. Here is what HR needs to know about this announcement.
Employee and Employer Contribution Limits for 2022
On Nov. 4, 2021, the IRS released Notice 2021-61, announcing new cost-of-living adjustments for contribution limitations as they relate to retirement accounts. Several changes were made overall including elective deferral amounts.
The annual benefit limitation as defined under section 415(b)(1)(A) of the Code has been increased to $245,000 from $230,000. The defined contribution plan limit has also been increased to $61,000 from $58,000, under Code section 415(b)(1)(A).
What Is the Difference Between a 401(k) Plan and an IRA
A 401(k) is a tax-free retirement savings account that many employers offer to employees as an employee benefit. These accounts allow employees to deposit pre-tax income into a savings account that can only be used once an employee has reached the age of retirement.
An IRA is a way of saving for retirement on your own without any participation by the employer. It is important to note that employers will also not be involved in any sort of matching contributions as it pertains to an IRA.
There are two different types of IRA’s:
A Traditional IRA is quite similar to a 401(k) in that it requires a participant to place money into the account tax-free. The money will then be taxed upon redemption of funds.
A Roth IRA involves placing post-taxed dollars into a retirement account so that upon redemption the funds are collected tax-free.
Changes to Income Phase-Out Range for IRAs and Saver’s Credit
The income ranges, which determine the eligibility for tax deductions of a traditional IRA, Roth IRA, and Saver’s Credit have all increased for 2022. This means that once a participant’s income reaches the “phase-out” range, the tax deduction will be limited and ultimately negated.
This ”phase-out” refers specifically to the range at which this loss of deduction occurs. This means that with an increase in the phase-out range, more employees will be able to maintain a tax deduction for retirement plan contributions.
Here are the increases for traditional IRA deduction eligibility:
The range for single taxpayers covered under a workplace retirement plan is now $68,000 to $78,000, an increase from what was previously $66,000 to $76,000.
When married couples file jointly, if the spouse making the contribution is considered covered by a workplace retirement plan, the phase-out range would then be $109,000 to $129,000, which is an increase from the previous $105,000 to $125,000.
If the individual contributing to the retirement plan is not covered under a workplace plan but is married to someone who is covered, the phase-out range will be increased to $204,000 to $214,000, which is increased from the previous $198,000 to $208,000.
For those who are married filing separately and are covered under a workplace plan, the phase-out range will not be subject to changes. It remains $0 to $10,000.
Income-range increases for a Roth IRA:
For taxpayers making contributions to a Roth IRA, the income range is now $129,000 to $144,000 for both singles and heads of household. This is an increase from the previous $125,000 to $140,000.
If married and filing jointly, the income phase-out range is now $204,000 to $214,000 which is increased from the previous $198,000 to $208,000.
For an individual who is married and filing separately, the phase-out range will remain unchanged at $0 to $10,000.
The Income-range increases for Saver’s Credit are:
The Saver’s Credit income limit for both low and moderate-income workers who are married and filing jointly is $68,000, which is an increase from the previous $66,000. For heads of household, the number is $51,000 which is increased from $49,500. The limit for singles or married couples filing separately is $34,000 which is an increase from $33,000.
The total amount that individuals are allowed to contribute to a SIMPLE retirement account is now $14,000 which is an increase from the previous $13,500.
Limits that Remain Unchanged:
The annual limit for IRA contributions will remain unchanged at $6,000.
The catch-up contribution limit for those individuals who are 50 years of age and older, will not increase. This limit remains at $1,000.
All catch-up contribution limits for employees who are 50 years of age or older and participate in a 401(k), 403(b), or most 457 plans as well as the Thrift Savings Plan, will not change. The limit remains at $6,500.
SIMPLE plan contribution amounts for employees who are 50 years of age or older will remain unchanged at $3,000.
How Do These Changes Affect HR?
Overall these changes are positive for your employees. It means they will be able to put away larger portions of their income into their retirement savings accounts. Many employees are becoming more heavily invested in their retirement funds, now that the feelings of insecurity revolving around the pandemic are beginning to fade.
Workers are more determined than ever to achieve their retirement goals. In Schwab’s annual survey involving 401(k) participants, they determined that 53% of over 1,000 employees thought they were likely to achieve these goals. This is a steep increase from the 37% reported in 2020.
These updates should be communicated to employees in a clear manner. Also, as a matter of best practice, consider reaching out to your 401(k) plan sponsors and/or vendors for additional guidance moving forward.
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