Congress is considering legislation that will give employees’ retirement savings for people in their 60s a boost. Under the proposed new laws, annual catch-up contribution limits to 401(k)s and IRAs could increase.
The changes are designed to allow aging workers to make up for insufficient retirement savings. The discussion below outlines those changes and to who they will impact.
Existing Contribution Limits
Once U.S. workers reach the age of 50, they can start making “catch-up” contributions to their retirement accounts. These catch-up contributions exceed the annual limits for workers under 50.
The purpose of catch-up contributions is to help older workers who are nearing retirement save more or make up for the lack of savings when they were younger. It is not unusual for people in their 20s to either shrug off the idea of saving for retirement or not have the means to do it.
Currently, annual contribution limits to a 401(k) are $19,500 for those under 50. If you are 50 or older, you can save an additional $6,500 in your 401(k).
Those who save for retirement using an IRA are generally capped at $6,000 per year. However, workers 50 and over can put in an extra $1,000 for a total of $7,000.
Proposed Contribution Limits
Under the pending legislation in the House, annual catch-up 401(k) contribution limits for those between the ages of 62 and 64 would increase to $10,000. However, the contributions would need to be made on an after-tax basis instead of a pre-tax basis.
What this means is that when you retire, you will not have to pay additional taxes when you withdraw those contributions. However, according to current payroll income tax rates, you will be taxed on those contributions.
- Catch-up contributions to SIMPLE IRA plans would also increase to $5,000.
- However, the legislation differs somewhat under the Senate’s proposed bill. The 401(k) catch-up contribution limit would still increase to $10,000 each year.
- The increased limit would apply to workers who are age 60 or older.
In addition, the contributions could be made under the current pre-tax arrangement. You will not pay any payroll or income taxes on those contributions until you retire and start withdrawing the funds.
Confirmed 401(k) Changes for 2022
The IRS has confirmed normal changes to 401(k) and IRA contribution limits for 2022. These changes will apply to both employees and employers, regardless of the employee’s age.
- The annual contribution limit for 401(k) plans will increase to $20,500, and the standard catch-up limit for those 50 and older will go up to $6,500.
- Annual contribution limits for employees and employers will be $61,000.
This includes employee and any employer matching contributions. Many employers offer these matches as incentives, but they usually do not apply beyond a certain percentage. So, for example, your employer might match 100% of the first 5% of employee contributions.
Let’s say you earn $50,000 a year and direct 5% of those earnings to your 401(k). That would amount to $2,500 a year. Then, your employer deposits an additional $2,500 in matching contributions for you, bringing your annual total to $5,000.
Of course, you could contribute more than 5% of your salary. However, you would need to figure in the $2,500 from your employer to stay under the $61,000 limit.
There are also limits on how much of your earnings can qualify for 401(k) contributions. That income limit will go up to $305,000 in 2022. This means that anyone who earns $305,000 or less can contribute 100% of that salary to an employer-sponsored 401(k).
But if you happen to earn more than $305,000, the income above that limit would not be eligible for 401(k) contributions.
Multiple Retirement Accounts
Some workers keep and contribute to multiple retirement accounts, such as a 401(k) and a Roth IRA. If all contributions between accounts do not exceed the maximum contribution limits, you can do this.
- So, if you have two jobs that offer 401(k) plans with matching contributions, you can contribute to both if you do not exceed the limit.
- If you have one job, you can still contribute to your 401(k) and contribute the maximum to your Roth IRA.
- However, some types of IRA accounts are subject to income limits. Roth IRAs have lower income thresholds than traditional 401(k)s.
- In 2021, the maximum annual gross income for individuals contributing to a Roth IRA is $140,000. For married couples who file their taxes jointly, the annual gross income limit is $208,000.
Roth IRAs work differently from traditional retirement plans since the contributions are made post-tax. However, once you reach retirement age and are ready to withdraw, you will not pay any additional taxes. Click on the following link to learn more.
Low- and Moderate-Income Earners
Workers who earn less than a certain amount are eligible for a tax credit to contribute to a retirement plan. This includes traditional 401(k)s, IRAs, and retirement accounts for employees in the public sector.
In 2022, the income threshold will increase to $34,000 per year for individual taxpayers. For the head of households, the maximum annual income will go up to $51,000. And for married couples, the combined yearly income limit will increase to $68,000.
If you earn $34,000 or less per year and contribute to a retirement fund, you can still qualify for a savers’ credit on your income tax form. The tax credit usually represents 10% to 50% of the first $2,000 of your annual contributions.
If you are a married couple, the tax credit can be applied to the first $4,000 of your combined contributions if you make $68,000 or less as a couple. So, for example, if your partner brings home $50,000 a year, you will still qualify if you only make $18,000.
401(k) contribution and income limits will already increase for 2022. However, they could increase even more for older workers in their 60s.
These proposed changes will apply to catch-up contributions only and not average savings amounts. The Senate’s version of the legislation is viewed as more favorable to older workers.