IRS Raises 2022 401(k) Contribution Limit to $20,500

Thanks to a higher-than-normal annual inflation rate of 5.4%, the Internal Revenue Service (IRS) says it will allow taxpayers to contribute up to $20,500 to their 401(k) and some other retirement accounts in 2022, a $1,000 boost from 2021 contribution limits.

This change is mandated by the tax code so there is no requirement for Congress to act. The benefit normally only goes to a relatively small number of taxpayers since most people do not max out their 401(k) contributions. A 2021 Congressional Research Service report indicated that just 8.5% of defined contribution plan participants max out their contributions.

Contribution Limits That Went Up

In addition to the new $20,500 contribution limit on 401 (k) plans, contribution limits for 403(b) and most 457 plans, and the federal government’s Thrift Savings Plans also increased from $19,500 to $20,500 for 2022.

Income ranges for determining eligibility to deduct contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2022 as well.

Traditional IRAs

• Single taxpayers covered by a workplace retirement plan can deduct up to the $6,000 limit ($7,000 if 50 or older) if their income is below $68,000. Phaseout begins at $68,000 and ends at $78,000, ($66,000 to $76,000 in 2021).
• Married couples filing jointly, when both are covered by a workplace retirement plan, can deduct up to the limit for income below $109,000 in 2022. Phaseout begins at $109,000 and ends at $129,000 ($105,000 to $125,000 in 2021).
• If you contribute to an IRA but are not covered by a workplace retirement plan and are married to someone who is covered, the phase-out range for 2022 goes up to $204,000 to $214,000, up from $198,000 to $208,000 in 2021.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the income phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

• Single taxpayers and heads of household can make the full $6,000 ($7,000 if 50 or older) contribution for income under $129,000. Phaseout begins at $129,000 through $144,000 for 2022. It was $125,000 to $140,000 in 2021.
• For married couples filing jointly, income phase-out begins at $204,000 to $214,000 for 2022 ($198,000 to $208,000 for 2021).
• A married individual filing a separate return has a phase-out income range of $0 to $10,000, no change from 2021.

Saver’s Credit and SIMPLE Account Limits

The income limit to claim the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers for 2022 is:

• $68,000 for married couples filing jointly, up from $66,000 in 2021
• $51,000 for heads of household, increased from $49,500
• $34,000 for singles and married individuals filing separately, up $1,000 from $33,000

The amount you can contribute to your SIMPLE retirement accounts increased $500 to $14,000 for 2022, up from $13,500 in 2021.

Contribution Limits That Stayed the Same

If you contribute to an individual retirement account (IRA) your contribution limit remains the same as last year at $6,000. Your catch-up limit if you are 50 or older also remains the same at $1,000. Roughly 4.7% of IRA account holders contribute at the limit each year, according to the Investment Company Institute.

Other catch-up limits, including the $6,500 catch-up contribution limit for people 50 and older in 401(k) and 403(b) plans, most 457 plans, and the federal government Thrift Savings Plan also remain the same as they are not tied to inflation.

Still to Come

The IRS has not yet announced changes in standard deduction amounts, tax bracket thresholds, and other items included in the tax code. Analysts, including Bloomberg Tax & Accounting, expect a jump of about 3% due to the high inflation experienced in 2021.