401(k) limits are going up next year. If you’re planning for retirement, here’s what you need to know.

A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. With changes to the new 401(k) contribution limit, retirement savers are now eligible to put $1,000 more in their plans for 2022. The 401(k) contribution limit is expected to increase to $20,500 in 2022. Here is a look at some of the income limits for 401(k) plans and how they will increase next year.

When an employee signs up for a 401(k), they agree to have a percentage of each paycheck paid directly into an investment account. Depending on the employer, they might match some or all of that contribution. The overall contribution limit to 401(k) plans, including employer and employee deposits, is 100% of the participant’s compensation or $61,000, whichever is less. For workers aged 50 and older, the overall contribution limit is $67,500, which includes catch-up contributions. The employee gets to choose among a number of investment options, usually mutual funds. 

There are two types of mutual funds, Traditional and Roth. Traditional 401(k) contributions are deducted from gross income. The money that is deducted comes from the employee’s payroll before income taxes have been deducted. With a Roth 401(k), contributions are deducted from the employee’s after-tax income. These contributions come from the employee’s pay after income taxes have been deducted. Here’s how the 401(k) plan limits will change in 2022:

• The 401(k) contribution limit is $20,500.
• The 401(k) catch-up contribution limit is $6,500 for those age 50 and older.
• The limit for employer and employee contributions will be $61,000.
• The 401(k) compensation limit will climb to $305,000.
• The income limits for the saver’s credit will increase to $34,000 for individuals and $68,000 for couples.

As mentioned, the contribution limit for 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan is $20,500 in 2022, up from $19,500 in 2021. You can take advantage of the higher contribution limit by contributing up to $83 more per month to your 401(k) plan beginning in 2022.

You can contribute to multiple traditional 401(k) and after-tax Roth 401(k) accounts in the same year, but your total 401(k) contributions to all accounts can’t exceed the annual 401(k) limit.

Traditional 401(k) distributions are taxed when the money is withdrawn. If you deposit more than the contribution limit, take care to withdraw the excess funds by April 15 of the year after you make the contribution to avoid additional taxes and penalties.

Highly paid employees may be restricted in their ability to make 401(k) contributions. A 401(k) plan can elect to stop salary deferrals once a participant’s compensation reaches $305,000 in 2022 and can only use up to this amount when providing a 401(k) match.

A catch-up contribution is a good benefit for highly compensated employees because unlike the first $20,500 of contributions that may be limited by their employer, the $6,500 catch-up contribution is available to any employee over 50, including those who are highly compensated. Since these workers tend to be in higher tax brackets, the catch-up contribution could save them up to 40 cents on each dollar they contribute.

It’s not just 401(k) planning that needs to be addressed for 2022. Now is the perfect time to review your performance over 2021 and make changes for the year ahead.

For some, this year may have brought changes to your financial plan. Considering the unusual circumstances of the past two years, it left many considering new careers and revamping their retirement saving plans.

Regardless of whether your career took a pivot or not, this is the time to recalibrate and set yourself up on firm financial footing for next year. Be sure to discuss the following financial checklist items with your retirement income advisor:

• Revisiting Your Budget: Revise or establish your budget by reviewing your 2021 spending and create a budget for 2022 and beyond. 
• Checking Investments: You may need to rebalance your portfolio to bring your investment holdings back in line with your risk tolerance and goals.
• Healthcare Insurance Policies: November and into December is typically open enrollment time for health coverage. Make sure you set aside time to review your health plan. 
• Financial Deadlines: Cutoffs to be aware of include:
  • Capital Gains Distributions
  • Charitable Donations
  • 529 Contributions
  • RMDs
  • Tax Loss Harvesting

Read more about these deadlines here.

Finding the right financial advisor that fits your needs doesn’t have to be hard. At CKS Summit Group, we have a wide range of talented financial advisors who are here to help you plan for 2022. 

If you’re looking to set the stage for a financially successful year in 2022, schedule a meeting with us to review your 401(k) planning and year-end financial planning checklist. The best and highest use of our experienced financial advisors is not only to help you address many of the issues on your checklist, but also to be your financial coach for the year ahead. 

If you’re ready to achieve your financial goals, contact us today.