News: IRS Boosts Limits on Retirement Plans for 2022
The IRS has changed limits on retirement plans in 2022. Find out if you’re impacted.
Contributing Writer at Tally
December 17, 2021
The IRS revisits its retirement savings guidelines and makes adjustments as needed every year. These adjustments include changing the annual contribution limits and the income constraints.
In 2022, the IRS will make significant changes to these limits, allowing:
People to save more annually
People with higher incomes to participate in more tax-advantaged retirement plans
Below, we’ll highlight the changes to retirement plans in 2022 and how they may impact you.
Contribution limits increased
For 2022, the IRS has increased the allowed annual contributions to $20,500. This includes:
Most 457 plans
Thrift Savings Plan to $20,500.
That’s a $1,000 increase compared to 2021’s $19,500 contribution limit and double the $500 increase from 2019 to 2020.
The IRS made no changes to the contribution limits on individual retirement accounts (IRAs), remaining at $6,000 annually.
What the contribution limit increase means to you
If you participate in a tax-deferred retirement savings plan, including a 401(k), 403(b), most 457 plans or the Thrift Savings Plan, you can channel more of your funds into your savings and reduce your tax burden.
For example, if you earned $60,000 per year and maximized your 401(k) contributions in 2021, the IRS would have only taxed you on $40,500 of your income. In 2022, you can increase your contributions by $1,000, lowering your taxable income to $39,500.
Income phase-out limits increased for 2022
The IRS has also increased some of the income phase-out amounts for 2022, making more workers eligible for tax savings when investing in an IRA.
Traditional IRA phase-out increases
Income phase-out limits on traditional IRAs indicate the maximum annual income range an individual or married couple can earn and still deduct IRA contributions from their income. The higher in the phase-out range you are, the less of your IRA contributions are tax-deductible.
If you exceed the top end of the income range, you can’t deduct any of your traditional IRA contributions.
The traditional IRA income phase-out amounts increased almost across the board.
Single taxpayers covered by a workplace retirement plan will see the income phase-out range increase from $66,000 to $76,000 in 2021 to $68,000 to $78,000 in 2022.
Married couples filing joint returns will see their income phase-out range increase from $105,000 to $125,000 in 2021 to $109,000 to $129,000 in 2022 (when the spouse making the contributions is covered by a workplace retirement plan).
A taxpayer who’s not covered by a workplace plan and is married to someone covered by a workplace plan gets their income phase-out increased from $198,000 to $208,000 in 2021 to $204,000 to $214,000 in 2022.
There are no changes to married folks filing separately and are covered by a workplace retirement plan. The income phase-out range remains $0 to $10,000.
These increases mean taxpayers who were just over the lower end of the phase-out numbers may now be able to deduct 100% of their traditional IRA contributions, potentially enticing them to increase their contributions to take advantage of the immediate tax savings.
Roth IRA contribution income phase-out range increases
Roth IRAs aren’t tax-deductible, so their income phase-out ranges limit how much an individual or married couple can contribute to a Roth IRA annually. The higher into the phase-out range you are, the less you can contribute each year. If you exceed the top end of the income range, you can’t contribute to a Roth IRA at all.
Like the traditional IRA increases, the Roth IRA boosts are almost across the board.
Single taxpayers or those filing as head of household will see their phase-out range increase from $125,000 to $140,000 in 2021 to $129,000 to $144,000 in 2022.
Married taxpayers filing jointly will see their income phase-out range increase from $198,000 to $208,000 in 2021 to $204,000 to $214,000 in 2022.
Married people filing a separate return will maintain an income phase-out range of $0 to $10,000.
Saver’s Credit income phase-out increases too
The Saver’s Credit gives low- to moderate-income taxpayers a credit for their contributions to an IRA or an employer-sponsored retirement plan. The credit is between 10% and 50% of your contributions. Your adjusted gross income (AGI), which is your gross income minus adjustments, determines your percentage.
For married couples filing jointly:
They get a 50% contribution credit if they earn $41,000 or less in 2022 (up from $39,500 in 2021).
Couples receive a 20% contribution credit if they earn $41,001 to $44,000 in 2022, (up from $39,501 to $43,000 in 2021).
Married couples get a 10% contribution credit if they earn $44,001 to $68,000 (up from $43,001to $66,000 in 2021).
Heads of household get a:
50% contribution credit if they earn $30,750 or less in 2022 (up from $29,625 in 2021).
20% contribution credit if they earn $30,751 to $33,000 in 2022 (up from $29,626 to $32,250 in 2021).
10% contribution credit if they earn $33,001 to $51,000 (up from $32,251 to $49,500 in 2021).
All other filers — i.e., single, married filing separately or a qualifying widow or widower — get a:
50% contribution credit if they earn $20,500 or less in 2022 (up from $19,750 in 2021).
20% contribution credit if they earn $20,501 to $22,000 in 2022 (up from $19,751 to $21,500 in 2021).
All other filers get a 10% contribution credit if they earn $22,001 to $34,000 (up from $21,501 to $33,000 in 2021).
These increases could entice more lower-income workers to begin investing in their retirement and taking advantage of these tax breaks — especially those in the 50% bracket.
Increases aim to boost retirement savings
With all the increases in phase-out limits, the IRS aims to push more workers into saving for their retirement with tax advantages. And with significant increases compared to previous years, these changes could move the retirement savings needle a bit.
Before making changes to your contributions, talk to a financial advisor or planner to make sure the decision is best for you.