You might think you have a solid retirement strategy. You might even take a look at your retirement savings account balance every so often and pat yourself on the back. But unless you’re maxing out your contributions, you might not be doing everything you could be. Each year, the IRS announces contribution limits for retirement accounts and these are important to pay attention to so that you can ensure you are saving as much as possible for the future.
For 2022, here are the IRS-determined contribution limits by account type:
- 401(k): $20,500 if you’re under age 50 (up from $19,500 in 2021), $27,000 if you’re age 50+ (up from $26,000 in 2021).
- SIMPLE 401k: $14,000 if you’re under age 50 (up from $13,500 in 2021), $17,000 if you’re age 50+ (up from $16,500 in 2021).
- IRA and Roth IRAs: $6,000 if you’re under age 50, $7,000 if you’re age 50+. Income-based contribution limits may apply.
- Defined Benefit plan (i.e. pension): Annual benefit limit is $245,000.
- Solo 401ks and SEP IRAs: $61,000.
- Health Savings Accounts (HSAs): $3,650 for those with self-only High Deductible Health Plans (HDHPs), $7,300 for those with family HDHPs.
- Qualified Longevity Annuity: maximum annual investment is $145,000.
What’s included in the annual contribution limit
All contributions made to your retirement account by you and your employer, and in the case of HSAs, by anyone else. If you’re eligible to contribute to multiple retirement accounts from your single employer, all contributions to each of those accounts gets added up toward the annual limit.
However, if you have a traditional retirement savings account through your employer as well as an HSA, those contributions are counted separately. Also, if you have a 457b plan, you will have separate limits for employee and employer contributions. To determine what those are, contact your plan administrator.
What’s not included in the annual contribution limit
Any rollovers or transfers from other retirement accounts, loan repayments, trust earnings, or growth on plan investments.
What happens if you go over your contribution limit
If you make excess contributions to a traditional retirement account (e.g. 401k, IRA, etc.), you have until April 15th of the following year to withdraw the excess amount. If you do this, the withdrawn contributions will be counted as part of your gross income for the year in which they were made. Any earnings by the excess contributions will be included in your gross income for the year in which you take the distribution. The 10% early withdrawal tax will not apply to these distributions.
If you don’t withdraw the excess contributions by April 15th of the following year, those excess contributions will be taxed twice. The contributions themselves will be included in your gross income for the year in which they were made, and then they will be taxed again once you withdraw them.
If you make excess contributions to an HSA, you have until April 15th of the following year to withdraw the excess amount. If you do this, the withdrawn contributions will be counted as part of your gross income for the year in which they were made. If you don’t remove the excess contributions by April 15th, you will pay income taxes on the excess amount, as well as an additional 6% excise tax.
Why you shouldn’t ignore the new IRS contribution limits
While it could be tempting to just do what you did last year, here’s why that might not be such a great idea:
Inflation. The IRS revises its limits upwards so that inflation doesn’t eat into people’s retirement savings. That means if you don’t also keep adjusting your contribution levels upwards, you might not end up with the purchasing power in retirement that you thought you’d have.
Your compensation may have changed. Typical employer-sponsored retirement plans ask participants how much they want to contribute based on a percentage of their salary. And if you get cost of living adjustments, you might think it’s enough to keep your percentage the same. But if you’ve received a performance-based raise, a promotion, a new job, or have experienced another type of increase in income, you might be able to save more than you could before. And because of compound interest, the more you save now, the many multiples of “more” you’ll have later in retirement.
You might think you’re “maxed out” but you’re really not. Even if you’ve maxed out your contributions to your 401k and traditional IRA, and your income limits any additional Roth IRA contributions, you can still contribute to an HSA.
If it makes sense to purchase a High Deductible Health Plan (HDHP) for 2022, and if you can afford to pay for the deductible in cash, maxing out your HSA can help you add thousands of extra dollars to your retirement savings. Just make sure to invest those contributions if you can.
However you use the new IRS contribution limits, make sure your accounts match your current investment strategy and risk profile. If you have specific questions about your retirement savings plan, reach out to your HR Department or the plan administrator.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.