The IRS announced that employees will be able to contribute an extra $1,000 to their 401(k) accounts in 2022. The change reflects higher cost-of-living adjustments to retirement accounts but does not affect IRA accounts.

Inflation means you probably should contribute more to your workplace retirement account in 2022.

Basic Limit on Elective Deferrals

  • Current retirement plan contribution limits for 401(k)s, 403(b), most 457, and Thrift Savings Plans are $19,500 a year for participants under the age of 50 and $26,000 a year for those 50 and over. The latter includes a catch-up contribution option of up to $6,500 per year.
  • In 2022, the $19,500 limit is increasing to $20,500. The $6,500 catch-up limit, however, isn't changing so employees who are age 50 and over will be able to save up to $27,000 into their 401(k) plans.

Data suggests that few taxpayers will take advantage of this increase as just 8.5% of defined contribution plan participants max out their contributions, according to a 2021 Congressional Research Service report.

If you are able to max out your retirement plan contributions in 2022, there are potentially significant tax savings. Traditional 401(k) plans are funded with pre-tax dollars so the more you contribute, the less taxable income you'll make. If you're in a higher tax bracket, the extra $1,000 could make a difference.

Because of compounding interest, the length of time you have additional money in your retirement plan can also make a significant impact.

If you have multiple 401(k) accounts, your total contributions to multiple accounts —both traditional and Roth—cannot exceed the $19,500/$20,500 limit. Contributions that you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.

Employer Contributions

Your employer may incentivize you to participate in a 401(k) plan by matching your contributions by adding, for example, 50 cents or $1 for every dollar that you contribute.

Employers may also make elective contributions. The general limit on total employer and employee contributions for 2020 is $57,000, or 100% of employee compensation (subject to a max of $285,000,) whichever is lower.

For workers age 50 and up, the base limit is $63,500 ($57,000 plus the $6,500 catch-up contribution.)

In 2021, the general limit on total employer and employee contributions is $58,000 and if you are age 50 and up, the base limit is $64,500, which includes the $6,500 catch-up amount. In 2022, these total contribution limits increase to $61,000 and $67,500, respectively.

Here is a handy table from IRS.gov.

COLA Increases for Dollar Limitations on Benefits and Contributions

IRAs 2022 2021 2020 2019
IRA Contribution Limit $6,000 $6,000 $6,000 $6,000
IRA Catch-Up Contributions 1,000 1,000 1,000 1,000
Traditional IRA AGI Deduction Phase-out Starting at 2022 2021 2020 2019
Joint Return 109,000 105,000 104,000 103,000
Single or Head of Household 68,000 66,000 65,000 64,000
SEP 2022 2021 2020 2019
SEP Minimum Compensation 650 650 600 600
SEP Maximum Contribution 61,000 58,000 57,000 56,000
SEP Maximum Compensation 305,000 290,000 285,000 280,000
SIMPLE Plans 2022 2021 2020 2019
SIMPLE Maximum Contributions 14,000 13,500 13,500 13,000
Catch-up Contributions 3,000 3,000 3,000 3,000
401(k), 403(b), Profit-Sharing Plans, etc. 2022 2021 2020 2019
Annual Compensation 305,000 290,000 285,000 280,000
Elective Deferrals 20,500 19,500 19,500 19,000
Catch-up Contributions 6,500 6,500 6,500 6,000
Defined Contribution Limits 61,000 58,000 57,000 56,000
ESOP Limits

1,230,000

245,000

1,165,000

230,000

1,150,000

230,000

1,130,000

225,000

Other 2022 2021 2020 2019
HCE Threshold 135,000 130,000 130,000 125,000
Defined Benefit Limits 245,000 230,000 230,000 225,000
Key Employee 200,000 185,000 185,000 180,000
457 Elective Deferrals 20,500 19,500 19,500 19,000
Control Employee (board member or officer) 120,000 115,000 115,000 110,000
Control Employee (compensation-based) 245,000 235,000 230,000 225,000
Taxable Wage Base 147,000 142,800 137,700 132,900

Stay tuned because there are more changes expected to come as the IRS announces other tax-related adjustments for 2022, such as updated income tax brackets and how much you’ll be able to deduct as part of the standard deduction in your tax return.

Remember when it comes to retirement savings, it's good to contribute early and often.

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Do you plan to increase your 401(k) retirement contributions next year?