Each year, the IRS designates contribution limits to qualified retirement plans. Maximizing your annual contributions is one of the best ways to efficiently save for retirement. But not every employer offers a retirement plan, and not all employer-offered plans are qualified retirement accounts.
Qualified plans are those that meet the requirements of the Employee Retirement Income Security Act (ERISA). This federal law was established to regulate retirement plans in the United States. Types of qualified accounts include:
- 401(k) plans
- 403(b) plans
- Certain individual retirement accounts (IRAs)
Learn more about the changes to qualified retirement contribution limits in 2022.
401(k) Contribution Limits
An employee puts money into their 401(k) via a process called salary deferral. This means that a portion of the employee’s salary is directed into their retirement plan. The employee usually cannot withdraw money from their 401(k) without incurring a tax penalty until after age 59.5, though there are some exceptions. In 2022, the limit on an employee’s elective deferral into their 401(k) is $20,500. This is an increase of $1,000 from the 2021 limit of $19,500.
Exceptions to the Deferral Limit
The 2022 deferral limit for SIMPLE 401(k) plans is lower than those of traditional 401(k)s. Only small businesses that employ 100 or fewer workers may offer a SIMPLE 401(k). The elective deferral limit for employees with a SIMPLE 401(k) is $14,000 in 2022, up from $13,500 in 2021.
Certain 401(k) plans allow plan participants age 50 and over to make “catch-up contributions.” During the 2022 calendar year, these eligible employees may contribute up to $6,500 in additional salary deferral for traditional 401(k) plans and up to $3,000 for SIMPLE 401(k) plans.
403(b) Contribution Limits
In practice, a 403(b) plan often works much like a traditional 401(k). Also known as tax-sheltered annuities, 403(b) plans are generally only available to employees of public schools and tax-exempt charitable organizations. In 2022, the limit on an employee’s contribution to their 403(b) plan is $20,500, the same as a traditional 401(k). An additional catch-up contribution of $6,500 is allowed for employees aged 50 years or older.
SEP-IRA Contribution Limits
A simplified employee pension (SEP) is a plan that establishes traditional IRAs for employees. Only the employer contributes to a SEP-IRA, not the employee. In 2022, an employer can contribute up to $61,000 to an individual employee’s SEP-IRA or up to 25% of an employee’s pay (whichever is lower). In 2021, the contribution limit was $58,000.
Exceptions to the Deferral Limit
Certain retirement plans established before 1997 are called Salary Reduction Simplified Employee Pension, or SARSEPs. Unlike SEP-IRAs, employees participating in SARSEP plans could contribute to their plans via elective salary deferral. In 2022, the SARSEP contribution limits are as follows:
- $20,500 for a participant’s elective deferral contributions
- $61,000 for overall (combined employee and employer) contribution limits
IRA Contribution Limits
Traditional and Roth IRAs aren’t employer-offered, but can be contributed to as long as a taxpayer has taxable compensation (if you are married filing a joint tax return, you can use your spouse’s compensation). However, it’s important to note that both traditional and Roth IRAs have annual contribution limits besides your taxable compensation for the year. In 2022, the total contribution to all of an individual’s traditional and Roth IRAs cannot be more than $6,000, unless the individual is 50 years of age or older. In this case, they can contribute up to $7,000 to their IRA accounts.
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