All retirement savings plans have contribution limits, which determines the maximum amount an individual can save in a given year. These limits have increased for 2022, allowing employees to set aside an extra $1,000 this year, compared to the contribution limit of 2021.
What is a 401(k) contribution plan?
A 401(k) is a tax-deferred retirement savings plan typically offered through an employer. An employee designates a certain percentage of their salary to flow directly into that account before any taxes are paid on that money. This is called elective deferral: The employee elects to defer part of their salary to their 401(k), before taxes. Employees may also have the option to make voluntary after-tax contributions to their 401(k), though they don’t often choose to, as these are not tax-advantaged.
Some employers also choose to contribute to employee 401(k) plans. The employer may match employee contributions dollar-for-dollar up to a certain amount or percentage of their salary, or contribute 50 cents on top of every dollar they contribute. Employers may also make other types of contributions to employee plans, like profit-sharing.
Basic 401(k) contribution limits
The annual elective deferral limit for a 401(k) plan in 2022 is $20,500. However, employees 50 and older can make an annual catch-up contribution of $6,500, bringing their total limit to $27,000. If an employer chooses to match some or all of employee contributions, those employer contributions do not count toward the elective deferral limit. They do count toward the individual’s overall contribution limit, however; for 2022, this overall limit is the lesser of 100% of their compensation or $61,000 ($67,500 if age 50 or older).
Traditional 401(k) vs. Roth 401(k) contribution limits
Again, traditional 401(k)s are employer-sponsored retirement plans. Employees make their contributions with pretax dollars, and the money isn’t taxed until it’s withdrawn in retirement. With Roth 401(k)s, contributions are made with after-tax dollars, so investors don’t have to pay taxes on their withdrawals.
Traditional 401(k)
The 2022 contribution limits for traditional 401(k)s are:
- For employees: $20,500, plus a $6,500 catch-up contribution for those 50 and older.
- For total employer and employee contributions: $61,000, plus a catch-up contribution of $6,500 for those 50 and older.
Roth 401(k)
The 2022 contribution limits for Roth 401(k)s are:
- For employees: $20,500, plus a catch-up contribution of $6,500 for those 50 and older.
- For employers: $61,000, plus a catch-up contribution of $6,500 for those 50 and older.
2021 vs 2022 contribution limits for traditional and Roth 401(k)s
Here are some key ways annual contribution limits changed in 2022.
- Increased total contribution limits. In 2022, the total amount employers and plan participants can contribute to a 401(k) is $61,000, or $67,500 with a catch-up contribution. In 2021, that limit was lower—$58,000, or $64,500 with a catch-up contribution.
- Increased thresholds for high-earning employees. Highly compensated employees are defined by the IRS as those earning $135,000 or more in 2022, or those who owned more than 5% of a company at any time during that period. In 2021, the employee compensation limit for calculating contributions was $290,000. For 2022, that number has risen to $305,000.
Contribution limits for other retirement plans
Investors without a 401(k) may want to consider other retirement plans as they work toward their savings goals.
403(b) plan
A 403(b) plan is administered by certain tax-exempt organizations such as public schools. Similar to a 401(k), 403(b) plans allow pretax contributions, and tax isn’t due until the money is withdrawn. The contribution limits for a 403(b) plan are:
- For employees: $20,500, plus a catch-up contribution of $6,500 for those 50 and older ($19,500 in 2021 and 2020)
- For employees and employers: $61,000 in 2022 ($58,000 for 2021)
Some plans allow employees who’ve worked at least 15 years to make an additional $3,000 contribution.
Simple 401(k) plan
A Simple 401(k) plan is run by small businesses with 100 or fewer employees. The contribution limits are:
- For employees: $14,000, plus a catch-up contribution of $3,000 for those 50 and older in 2022
- For employers: a dollar-for-dollar match up to 3% of employee pay or a 2% non-elective contribution for each eligible employee
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows employees and employers to contribute to traditional IRAs for employees. The contribution limits are:
- For employees: $14,000, plus a catch-up contribution of $3,000 for those 50 and older in 2022
- For employers: Generally required to match employee contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation, or nonelective contributions of 2% of each eligible employee’s compensation
SEP IRA plan
Businesses of any size can establish a Simplified Employee Pension Plan (SEP) IRA. The contribution limits are:
- For employees: No contributions allowed
- For employers: Pretax contributions cannot exceed the lesser of 25% of an employee's compensation or $61,000 in 2022 ($58,000 for 2021)
The bottom line
Many investors track the IRA contribution limits set by the IRS. The contribution limits for 401(k) plans did increase slightly, allowing employees and employers to both contribute even more money toward retirement savings.
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