Thinking About Retirement? Know The 401k Contribution Limit In 2022
If the ongoing economic uncertainty has taught us anything, it's that it's never a bad time to begin building up a financial safety net for when times get tough. This is particularly true when it comes to your retirement years, as without a stable income, any financial issues could severely deplete your savings. With this foresight in mind, it's a good idea to start contributing to your own 401k plan. Still, before you embark on this financial journey, it's important that you understand the ins and outs of this fund, particularly the maximum contribution limit for 2022.
Why is there a limit?
If you're the one contributing money from your own paycheck to your 401k, then you may be wondering why a limit on your contributions exists. The main reason is that the 401k plan comes with tax advantages, so the IRS does not want to enable wealthier employees to benefit from these perks more than their less well-off counterparts. While contribution limits do vary depending on age, income bracket, and the type of retirement plan, there is a ceiling for all 401k plans.
What is the maximum contribution limit for 2022?
The contribution limit for all 401k plans is $20,500. This means that, depending on the amount you earn, you could contribute your entire salary to this retirement plan if you wanted to. Still, there are some exceptions to this rule that enable some contributors to exceed this limit.
The exceptions
First off, there are "catch-up" contributions. This is where individuals aged 50 and older are permitted by the IRS to exceed the regular contribution limit so that they can boost their savings as they edge towards retirement. Those who are deemed eligible for catch-up contributions are permitted to contribute an additional $6,500 to their 401k plans. There is also the option for employees to receive additional contributions from their employers. This happens when employees offer this as a job perk and sees employers matching the 401k contributions of their employees. But while exceptions exist that increase contribution limits, there are also those that decrease these limits.
When contribution limits decrease
While a rare occurrence, contribution limits can decrease in the case of highly compensated employees (HCE). To be considered an HCE, you have to be earning a salary of $135,000 per year or more. Once you're in this category, the IRS will also look at how many other employees in your company are contributing to 401k plans as well. If HCEs benefit disproportionately from 401ks, then the IRS may reduce their contribution limits. This is only done if it is believed that a decrease could prevent the company from favoring employees who are compensated higher. Once you know which limits apply to you, it's important to understand how much money someone in your situation should be contributing in order to get the most out of your retirement savings.