If you're trying to beef up your retirement savings in 2022, the 401(k) may get you one step closer to that goal.
You can park more money in your 401(k) for 2022 thanks to the latest inflation-adjusted contribution limits released by the IRS. This means you can catch up on any retirement savings opportunities you may have missed in previous years.
We'll dive into how a 401(k) works and review the latest rules so you can use your retirement account to its full potential.
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How a 401(k) works
If you haven't paid attention to your 401(k) before, this is a good time to explore the benefits and determine if it makes sense for you.
A 401(k) is an employer-sponsored retirement savings plan that provides special tax perks. Every dime that you contribute -- up to the limit -- can reduce your current-year tax bill.
If you earn $100,000 a year and contribute $19,500 in 2021, your taxable income (assuming no other tax benefits) would be $80,500. You can use the money to invest in assets offered by your employer's plan.
Also, you won't have to worry about paying taxes immediately on the dividends, interest, and profits you may earn every year. The 401(k) allows you to defer paying taxes on your contributions and earnings until you withdraw the money.
A greater boost in 2022
You most likely won't be able to stuff your entire paycheck into a 401(k). There are annual limits that will help you determine how much you can contribute. However, in 2022, that limit is rising.
The IRS increased the elective deferral limits from 2021 to 2022. Qualified individuals can contribute up to $20,500 from their paycheck to their 401(k), up from $19,500 in 2021. If you're 50 or over, you can make an additional $6,500 catch-up contribution.
The salary cap for determining the amount of compensation eligible for qualified 401(k) contributions has also increased. The limit jumped to $305,000 in 2022, up from $290,000 in 2021.
If you are considered a highly compensated employee, you should review the 401(k) rules thoroughly to determine your limits. If your income exceeds the salary threshold, you may still be eligible to contribute to a 401(k). However, your employer may not be able to continue making contributions to your account.
Look into matching contributions
Your employer may throw in a bonus contribution to make the pot sweeter. Many employers may match 100% of your contributions up to a certain limit or match a certain percentage of your contributions. Essentially, your employer is giving you free money for socking cash away in your 401(k).
Let's say your employer decides to contribute 50% of every $1 you contribute, up to 4% of your salary. If you earn $100,000, 4% of your salary ($4,000) is eligible for matching. If you contribute $4,000 to your 401(k), your employer will add in $2,000. Anything you contribute over the $4,000 won't be eligible for your employer's matching contribution program, but it can still boost your retirement savings.
For 2022, the total regular contributions (not catch-up contributions) for the employer and employee cannot exceed $61,000, or your annual pay, whichever is less.
Your 401(k) game plan
You can crush your 401(k) goals this year and build wealth in your retirement account. It starts with being intentional and having a retirement success plan to guide your moves.
First, determine how much you want to contribute for the year. If you can contribute the maximum amount ($20,500 for 2022), you'll save more money in taxes in 2022.
Calculate how much you need to set aside from your paycheck to meet your target contribution amount. Look into matching contributions to see how much extra money you can rack up in your account.
If you're thinking about leaving your job soon, check your 401(k) vesting schedule. You may have to wait a few years before your employer contributions are officially yours to keep. All the money you add to a 401(k) will automatically be yours as soon as you contribute. However, you may be on the hook for taxes and penalties if you tap into your account before you are eligible to do so.
401(k) contribution limits are better than ever
This is your chance to plan ahead and create a game plan to achieve your 401(k) goals for 2022. Think about your long-term retirement ambitions and how you can leverage your 401(k) to move you in the right direction. Thanks to the latest 401(k) limits, you can accelerate your savings goals and cut your tax tab even more in 2022.
