2021 & 2022 Maximum 401(k) Contribution Limits

2021 & 2022 Maximum 401(k) Contribution Limits

Saving for retirement is something that everyone should keep in mind-- whether they're just starting in the workforce or retiring soon. Although saving for retirement may be intimidating for those who aren't familiar with the subject, it is easier with a 401(k) plan. What if your employer offers a 401(k) retirement plan? In that case, it's probably best to start contributing as soon as possible. This article will help explain what a 401(k) is, contribution limits, and types of 401(k) plans.

What is a 401(k)?

A 401(k) is the most popular employer-sponsored retirement plan in the United States. A 401(k) is a retirement savings account that allows employees to contribute a portion of their paycheck into long-term savings for retirement. Some employers may also match their employees' contributions up to a specified limit.

In addition, 401(k) plans are eligible for special tax benefits under IRS guidelines. Meaning that the investment earnings in a 401(k) are not taxed until the user withdraws the funds. So, until you withdraw money from your 401(k) (usually in retirement), the funds in your account will grow without the burden of taxes. In addition, 401(k) contributions reduce your taxable income due to tax benefits. Generally, 401(k) plans are excellent for employees looking to save money for retirement.

2022 Contribution Limit Changes

Before the beginning of the year, the IRS made updates to contribution limits for 2022. In 2021, the basic contribution limit was $19,500; however, for 2022, the IRS raised this limit by $1,000, making it $20,500. Also, this limit is for your total contribution to 401(k) plans, meaning that if you have multiple 401(k) accounts, the total sum can be no greater than $20,500. This contribution limit does not affect any other types of retirement accounts you may have, like IRAs, for example. People 50 and up can contribute an additional $6,500 for catch-up contributions, making their total limit for 2022 $27,000.

Also, contributions to your 401(k) account are typically due by the end of the year. Therefore, it is essential that you review your contributions at the end of every year. If, for example, you discover your contributions for the past year exceed the contribution limit, you should notify the IRS by March 1st. Afterward, you'll receive your excess contributions by April 15th.

Types of 401(k) Plans

In addition to the traditional 401(k) plan we've described above, other alternatives require consideration when planning for retirement.

  • Roth 401(k) - Like a traditional 401(k), a Roth 401(k) is an employer-sponsored retirement savings account. However, unlike a traditional 401(k), a Roth 401(k) invests after-tax income instead of pre-tax, which means that it is tax-free when you withdraw your money. Also, just like a traditional 401(k), your investments in a Roth 401(k) grow tax-free. Lastly, contribution limits are the same for both Roth 401(k)s and traditional 401(k)s. In 2022, for example, if you're under 50, you can only invest a total sum of $20,500, which goes towards either or both plans.
  • Solo 401(k) - A solo 401(k), also referred to as an independent 401(k) or one-participant 401(k), is an option for self-employed individuals. To be eligible, you must make income from your own business. Also, you or you and your spouse must run the company. Freelancers, sole proprietors, small companies with no employees, and independent contractors typically use a solo 401(k).

    If you are eligible, you have to make a written declaration with the plan you wish to fund. After that, your plan will be the same as any 401(k) or Roth 401(k), except that the contribution limit is much higher. In 2022, the contribution limit was raised from $58,000 in 2021 to $61,000, with $6,500 for catch-up contributors 50 years or older.

  • SIMPLE 401(k) - A SIMPLE 401(k) plan is available to employees working for a small business with 100 or fewer employees. The SIMPLE 401(k) plan is the same as a traditional 401(k), mixed with a SIMPLE IRA and minor changes. Like a 401(k), employees can invest a portion of their paycheck in their plan. However, employers must match these contributions or make a non-elective contribution of a specified amount of employees' wages.

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