Blog Invest 401(k) Contribution Limit: What to Expect in 2022

401(k) Contribution Limit: What to Expect in 2022

date November 12, 2021 time 5 min read 2077 views

401(k) offers one of the best ways available to save for retirement thanks to their tax efficiency, strong returns, and the possibility of benefitting from employer contributions. However, one thing savers have to look out for is the ever-changing max 401(k) contribution limits, which are due to shift again in 2022. Let’s examine how the thresholds will change, whether it will affect you, and how to react.

Every year, the IRS introduces new 401k 2022 contribution limit irs, changing how much taxpayers can save in their accounts, who is eligible to save, and how we should approach our retirement strategies. Keeping track of the latest rules and knowing what to do about them is a key part of good financial management. So, what do the new thresholds mean for you and your retirement plans? 

In this post, we’ll tackle these questions and break everything down, before moving on to examine the returns you can expect from a 401(k) and whether opting for one is even the right choice for you. But first, let’s take a look at exactly what the IRS has announced and 401k 2022 contribution limit irs.

Max 401(k) contributions capped at $20,500

If you kept up with the news at all in 2021, you’ll probably already know that inflation has been significant; it’s a reaction to the government’s stimulatory COVID-19 policies, which aimed to keep individuals and businesses afloat. There is a way to combine inflation and interest rates to ensure you can profit, whatever happens. By the latest measures, US inflation hit 4.6%, representing a 30-year high. 

Max 401(k) contributions will increase in 2022, partly thanks to significant inflation.
Max 401(k) contributions will increase in 2022, partly thanks to significant inflation. (Source: Pixabay)

We might not quite be at the Weimar Republic yet, but this is a serious increase.

Higher inflation means that every dollar is effectively worth less than before since prices have risen, meaning a dollar can buy fewer goods and services. So, to compensate for this phenomenon, the IRS has opted to increase the max 401(k) contribution limits up from $19,500 in 2021 to $20,500. 

These are high numbers that most people can only dream of. But for those lucky enough to reach the thresholds, this policy is a major change that will allow them to save and grow a lot more and prepare for retirement.  

However, we’re not finished yet. There’s a fair amount of variation in how much you can save depending on the plan you have and even how old you are, so let’s take a closer look.

Variations on the contribution limits

One of the main distinctions is that anyone over 50 can put an extra $6,500 into their account. This catch-up amount remains changed from 2021, but combined with the other threshold increase, it takes the 401k 2022 max contribution limit irs for over-50s up to a whopping $27,000.

The IRS has also increased thresholds for other types of accounts, including 457, Thrift Savings Plans, and many 403(b) retirement plans. However, not all accounts have benefitted. 

IRA contributions are still capped at $6,000 (or $7,000 for those over 50), although the finer details associated with contributing have changed for IRAs and a few other accounts. There’s an income level at which you can no longer contribute the full $6,000 (or $7,000) to your account, and an income level at which you can’t contribute anything at all. 

In 2021, the level at which income affects contribution started at $66,000, with contributions ruled out altogether at $76,000; but these numbers will increase to $68,000 and $78,000 respectively in 2022.

The IRS is responsible for changing 401k 2022 contribution limit irs each year.
The IRS is responsible for changing 401k 2022 contribution limit irs each year. (Source: Wikimedia)

There are also separate rules depending on whether you file taxes as an individual or in a married couple, and those who aren’t part of a retirement plan at work don’t face these limits at all. Plus, the contribution and phaseout limits for Roth IRAs and Saver’s Credit have also increased.

Phew—it’s a lot to get your head around. You can find the full breakdown of the changes on the IRS website.

Average returns of 401(k)s

Understanding how the 401k 2022 contribution limit irs will change in 2022 is just the first step. Next, you’ve got to pay some attention to how to maximize your returns. With so many accounts and options available, you might be wondering where to put your money as part of your retirement strategy—regardless of whether you’re at the lower or higher end of the contribution limits outlined above. And your first question is probably about the kinds of returns to expect.

When you deposit your paycheck into a 401(k), the provider invests it into retirement funds on your behalf; usually assets like mutual funds, creating your own index funds, and bonds (you can choose the funds yourself). Therefore, the kinds of returns you should expect will depend on which assets you choose and how well they perform. Someone who invests into aggressive high-growth funds can expect a larger return than someone who invests in something more conservative like bonds.

Now you know what to expect from the 401k 2022 contribution limit irs, you can go full-speed ahead with your retirement planning.
Now you know what to expect from the 401k 2022 contribution limit irs, you can go full-speed ahead with your retirement planning. (Source: Pixabay)

However, if you want to talk about averages, you’ll be pleased to know that the average returns for 401(k)s in 2020 was 15.1%—not bad considering interest rates on savings accounts that year rarely went above 1%, meaning they failed to beat inflation. 2020 was a particularly good year for the stock market, so you can’t expect similar returns every year, and it’s inevitable that your investments will drop some years when we experience recessions. 

Still, over the last five years, 401(k)s yielded returns of 11% on average, which is almost as good.

Should you invest in 401(k)s?

These returns aren’t the only advantage of 401(k)—they’re also very tax-efficient, and some employers opt to match contributions. In most cases, 401(k)s should play an important role in a retirement portfolio if you’re eligible. In fact, it makes sense to put in as much as possible up to the max 401(k) contribution limit if you can.

However, just because 401(k)s are good, it doesn’t mean that they’re the only thing you need for good financial health. Or maybe you’re not eligible because of the phaseout and you need an alternative. Have you’ve ever heard that your enneagram core motivations and enneagram types core motivations can affect how you treat and manage your money.

Either way, it might be time to look elsewhere. Investing in different markets is a key part of diversification; it means that even if the stock market is struggling, your other assets might help to keep your portfolio at large in the green. 

Plus, everything in your 401k 2022 contribution limit irs is illiquid—you can’t withdraw it before you turn 59 and a half without a 10% penalty. In contrast, more flexible asset types (like stock or cryptocurrency holdings) can be sold at short notice and without a penalty.

Interested in learning more? Keep reading.

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