It can be tough to save money for long-term purposes. Under that guise and to encourage savings for various needs – such as retirement, healthcare, and college costs, the government has continued to offer lucrative tax breaks for investors. From IRAs and 401(k)s to HSAs and 529 plans, the IRS provides investors with the ability to lower their current taxes, defer taxes, or avoid taxes altogether. However, there is a rub in their generosity.
The IRS limits just how much money you can put in various accounts.
The good news is that the IRS reevaluates contribution limits on various accounts. While it doesn’t always happen and Uncle Sam has gone long stretches without changing contribution limits, this year the Feds decided to be a bit more generous on some fronts. On the whole, contribution limits have risen for various accounts.
For savers, this is great news and we should all be working towards maxing out these limits.
Be sure to check our Portfolio Management Channel to learn more about different portfolio rebalancing strategies.
Expanded Amounts
One of the great things about the various accounts dedicated for a specific savings purpose – retirement, healthcare, etc. – is that they not only lower taxes today, they also offer tax-deferred or tax-free growth. For example, while traditional 401(k) accounts allow for a reduction in income taxes today, they also enable investors to defer the taxes on the account until withdrawing the funds.
For Uncle Sam, it’s a two-edged sword. The government wants to encourage saving, but they also need to fill their own pockets. And under that guise, the Fed places limits on how much investors can save in various account types.
The win is that when Uncle Sam takes a look at these amounts, he’s sometimes a bit more generous. Taking into consideration factors such as inflation, economic growth and longevity, the IRS can (and does) increase limits. And 2022 is one such year.
Employer-Sponsored Retirement Plans
For most savers, their 401(k)s, 403(b)s and 457 plans are their largest assets. Depending on the variety – Roth vs Traditional, these retirement plans offer the ability to lower taxes today and defer growth. For the new year, investors can look to save a bit more in these accounts.
This year, the average investor can sock away $20,500 into their employer-sponsored retirement plan. This is an increase of $1,000 versus 2021’s contribution limit. Older workers are allowed to make so-called catch-up contributions to their accounts. However, the IRS did not provide a boost to these limits. Savers over 50 years old can invest $27,000 in their 401(k)s for 2022, which only includes the previously stated $1,000 increase.
All in all, the combined total employer/company match and employee contributions cannot exceed $61,000 for the year. Employees aged 50 and older max out at $67,500.
Individual Retirement Accounts
For many investors, individual retirement accounts (IRAs) form the next leg for retirement and long-term savings. Like a 401(k), they offer both tax-deferred and tax-free savings depending on the variety you choose. Unfortunately, the IRS did not up the limits on IRA contributions this year and they remain unchanged at $6,000 for 2022. The catch-up contribution rate for those over 50 stayed the same at $1,000 as well.
However, the IRS did throw savers a bone with regards to Roth IRA accounts. Roths offer no upfront tax deduction, but they do allow for tax-free withdrawals in retirement. This is very lucrative, and as such, the IRS puts limits based on income. For 2022, those limits have increased. For a married couple filing jointly, they can still make Roth contributions up to $214,000 income. That’s $6,000 higher than last year’s numbers. Single filers can now earn up to $144,000 and still contribute to a Roth.
This is a potential boon to high income savers and provides the ability to eliminate future taxes with a Roth account.
Check out our retirement channel to learn more about investing geared towards your retirement goals.
Saving More for Healthcare
Health savings accounts (HSAs) are the hot new trend for retirement savings. These accounts offer the trifecta of tax savings, including tax deductions now, tax-deferred growth and even tax-free withdrawals if used for healthcare expenses. Moreover, there are all sorts of tips and techniques to use HSAs effectively in retirement for healthcare expenses occurring today. Because of their effectiveness at skirting taxes, the IRS places limits on the amount of money investors can contribute.
For 2022, Uncle Sam has raised those amounts. For the new year, individuals can contribute up to $3,650 to an HSA, while families can contribute up to $7,300. This is a $50 and $100 increase, respectively. On top of that, HSAs offer a similar catch-up contribution for those account holders 55 or older. In this case, an extra $1,000, whether or not it’s individual or family coverage. While the increases aren’t huge, they do offer additional compounding opportunities.
Saving More In 2022
While Uncle Sam’s increases on retirement accounts weren’t as lucrative as previous years, they still offer savers the ability to sock away more and reduce taxes both now and into the future. With that, savers should work diligently to max these accounts to their benefit. Slight increases here and there can go a long way to improving an investor’s savings picture and take advantage of all the benefits.
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