Max Contribution Limit for 401k Increased for 2022

School of Employer Plans

A file folder with the label ‘401k’.

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Since the 1980s, when they began increasing in popularity, defined contribution retirement plans, like 401(k)s, have become a key component to many Americans’ retirement plans. In fact, as of 2020, about 60 million Americans maintained a 401(k).

It’s also important to note that the amount that each employee can contribute to their employer sponsored retirement plan is limited, and this year, that amount will increase. By staying abreast of these changes, you can be confident that you are maximizing the benefits of your retirement accounts.

2022 Employer Sponsored Plan Maximum Contribution Amounts

In 2022, the maximum amount that employees can contribute to their employer sponsored plans including 401(k)s, 403(b)s, 457s, and government Thrift Savings Plans is $20,500. This is a $1,000 increase from 2021’s limit.

One exception to this annual deferral limit exists for employees aged 50 or older. These individuals can contribute up to an additional $6,500. These additional salary deferrals are called ‘catch up contributions’ because they allow employees nearing retirement to catch up on years where they may not have contributed as much to their retirement. The allowable catch-up amount is unchanged in 2022. So, this year, participants who are age 50 or older can defer a maximum of $27,000 to their retirement plans.

In addition to the annual limit on employee salary deferrals, the total allowable contribution to a 401(k) or other employer sponsored retirement plan will increase in 2022. This total contribution limit includes employee deferrals, employer matching, and profit-sharing employer contributions. In 2022, the total annual limit for contributions to employer sponsored plans will increase to $61,000 from $58,000. For those age 50 and older, the total limit is increased to $67,500 to account for catch-up deferrals.

Tips for Getting the Most from Your Employer Sponsored Plan

Making regular contributions to your employer sponsored retirement plan can help you reach your retirement goals. To maximize the effectiveness of your 401(k) contributions, consider the following tips.

Increase Your Contributions in January

Consider increasing your contributions to account for the new, higher employee deferral limit as soon as possible. If you increase your contribution amount in January, you can take advantage of dollar cost averaging throughout the year. Dollar cost averaging refers to purchasing shares of your investments on multiple dates throughout the year to spread out your cost basis and minimize the effects of price changes on your investment returns.

Contribute Enough to Receive Your Full Employer Match

If contributing the maximum amount doesn’t fit into your budget, consider contributing at least enough to get your full employer match. One estimate shows that 82% of employers offer matching for 401(k) contributions. Most plans match between 3% and 5% of employee contributions. However, the methods for calculating employer match vary by plan.

For example, some plans match 100% match of employee contributions up to the employer’s limit while others match 50% of employee contributions up to the employer’s limit. Find out how your employer handles matching by reviewing the plan document or speaking with your HR department.

For participants, employer matching contributions are like free money. If your employer matches your contributions, make sure that you contribute enough to take full advantage of the match. This can help your retirement savings grow faster than relying solely on your own contributions and investment returns.

Consider the Timing of Your Contributions

Dollar cost averaging is just one advantage of making contributions each month. Another important factor to consider is how your employer processes matching contributions. Some employers only match during the months that you make contributions. This can mean that if you front-load your 401(k) in the first months of the year, you could miss out on matching contributions for the rest of the year.

For example, consider an employee with a salary of $246,000 per year, or $20,500 per month (for mathematical simplicity we will ignore taxes and other payroll deductions). To make the maximum contribution for the year, which is $20,500 in 2022, the employee could make the full contribution in January and contribute 0% for the rest of the year. If their employer matches contributions up to 4% of an employee’s salary, the employer would contribute $820 in January, 4% of the employee’s salary that month. Since the employee did not contribute in any other month, the employer contributes $0 for the remaining months of the year. However, if the employee contributes 8.33% of their income each month, $1,708, they would still contribute a total of $20,500 for the year. In this case, the employee would receive an $820 match each month from their employer, totaling $9,840 for the year.

Keep in mind that not all employers calculate their match based on the pay period. Some offer reconciliation based on your salary to bring your contribution up to the total match for your salary each year. That’s why it’s important to check your plan document or speak with your HR department to determine how your employer processes matching contributions.

If your employer does not have the payroll matching limitation mentioned above, front-loading your 401(k) contributions at the beginning of the year could give your funds more time to grow. On the other hand, making all of your contributions, and immediately investing those funds as a lump sum, can increase the volatility of your investments. Speak with a financial advisor to weigh the pros and cons of dollar cost averaging verses lump-sum investing.

Review Your Asset Allocation

When reviewing your asset allocation, first make sure that your funds are invested according to your unique goals and risk tolerance. When you enroll in an employer sponsored retirement plan, there is often a default investment. This is where your funds will be invested if you do not choose another option. In some cases, the default investment is a cash equivalent or money market. These types of investments are not exposed to potential gains and losses in the stock and bond markets. For most people, this means that their retirement account will not grow at the rate they are expecting. To increase your chances of having a sizeable nest egg at retirement, make sure that your funds are invested in a way that match your risk tolerance and investment goals.

As your priorities change, your asset allocation should change as well. Early in your career, you may find that you have a higher risk tolerance. In these years, your portfolio should be more heavily weighted toward growth assets. Then, as you near retirement, you may find that you have less appetite for risk in your portfolio – because you have fewer years to overcome any drops in the market. In these later years, you may shift your investments towards an income focus.

No matter where you are in your career, your asset allocation should reflect your unique situation, goals, and risk appetite. Therefore, an allocation that works for your coworkers or family members may not be the best allocation for you. To explore which allocation is right for you, speak to an experienced financial advisor – like those here at Meld Financial. An effective financial advisor can help you weigh the risks and potential gains of different investment types and choose an allocation that meets your needs.

Rebalance Your Account

As your investments grow, you could become overly weighted in one asset class that performed well since your last rebalance. Review your holdings and make necessary changes to keep your portfolio in line with your goals. When rebalancing your accounts, remember to update your preferences for how new contributions are distributed among your investment lineup.

Consider Your Roth Options

About three quarters of 401(k) plans offer a Roth option. Directing your salary deferrals to a designated Roth account will not lower your taxable income this year but may help reduce your tax burden after you retire. Those with an extended time horizon, high risk tolerance, or expect to be in a high tax bracket during their retirement years, may benefit from adding Roth to their portfolio. To determine if Roth contributions are right for you, speak to an experienced financial advisor.

Review your Financial Plan with an Experienced Advisor

At Meld, our team of tax, legal, and financial professionals can help you determine how your 401(k) fits into your overall retirement plan. Our experienced team will work with you to develop your Financial Fingerprint™ – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change.

With your Financial Fingerprint™, and an ongoing relationship with an experienced financial advisor, you will have the tools to plan for a successful retirement. Contact a member of our team to get started today.

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