Recently, the IRS announced that it boosted the annual cap for 401(k), 403(b), and most 457 plans contributions by $1,000 from this past year. With this increase, workers will now be able to set aside up to $20,500 for the 2022 year. In addition to this the overall limit (which includes employer contributions), will increase to $61,000 in 2022 from its previous limit of $58,000.

Cost-Of-Living Adjustments (COLA)

The change to the cap on 401(k) contributions comes as a part of the tax code’s annual inflation adjustments, which do not require any actions from Congress for approval. These benefits will largely be utilized by those who are high-income earners and able to max out their 401(k) contributions. Setting aside over $20,000 from current incomes can be difficult as it is a large chunk of money, and according to a Congressional Research Service Report, only about 8.5% of people hit the maximum in 2018.

Unfortunately for those who utilize other tax-advantaged retirement accounts, the contribution caps will remain the same. This includes the $6,000 limit on IRA contributions and the $1,000 catch-up contribution limit for those 50 and over.

Deductible Contributions

When contributing to a traditional IRA, taxpayers can deduct contributions dependent upon qualifying for certain conditions. If a taxpayer or the taxpayer’s spouse is covered by a retirement plan at work, the deduction may be reduced, or phased out until it is eliminated, depending on filing status and income. Those not covered by a retirement plan at work will not be affected by these phase-outs. Here are the phase-out ranges for 2022:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to $68,000 to $78,000, up from $66,000 to $76,000
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 to $129,000, up from $105,000 to $125,000
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000

There were several other increases to other phase-out ranges, that are not directly related to having retirement plans through work:

  • The income phase-out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000
  • For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000
  • The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000

Saver’s Credit

Another advantage of contributing to tax-advantaged retirement accounts is the Saver’s Credit, which is meant to assist low to moderate-income workers. The saver’s credit cutoff limits increased from $66,000 to $68,000 for married couples filing jointly; from $49,500 to $51,000 for heads of households, and from $33,000 to $34,000 for singles and married individuals filing separately. This credit is awarded at three different rates; 50%, 20%, or 10% of your contribution dependent upon where your Adjusted Gross Income sits.

Looking for more guidance on tax-advantaged retirement accounts? Give us a call at 516-541-6549, and be sure to stay up to date with current events by reading our articles!

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