The IRS reviews the limits on contributions to retirement plans like 401(k) plans every year. Occasionally, typically in response to rising inflation, it raises these limits. Such is the case in tax year 2022. However, there are possibly greater changes in store for a different type of retirement account in 2022, the so-called “backdoor” Roth IRA. Here’s an overview of both current and proposed changes to these two types of retirement plans in 2022.
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Changes to 401(k) Limits in 2022
For tax year 2022, workers can contribute the lesser of 100% of their salaries or $20,500 to a 401(k) plan. This is an increase of $1,000 from tax year 2021, in response to the rising inflation rate. Workers ages 50 and over are allowed to contribute an additional amount, known as a “catch-up” contribution. For tax year 2022, the catch-up contribution limit remains at $6,500. This means workers 50 and older can kick in a maximum of $27,000 to their 401(k) plans in tax year 2022.
Many employers offer to match a portion of the money you put into your 401(k). The IRS doesn’t control how much of a matching contribution an employer offers. However, there is a limit to the total amount of contributions that can be made by both employers and employees. For tax year 2022, this total limit is $61,000, up from $58,000. For workers 50 and older, the total limit rises to $67,500 for tax year 2022, up from $64,500 in 2021.
What Is a Backdoor Roth IRA
A backdoor Roth IRA is a strategy used by wealthy taxpayers to get money into a Roth IRA, even if they earn more than IRS income limits. For example, for tax year 2022, joint filers can’t contribute to a Roth IRA if they have a modified adjusted gross income of above $214,000. For single filers, the limit is $144,000. The solution in both of these cases is the backdoor Roth IRA.
The backdoor Roth IRA isn’t a special type of account, but rather a strategy. While the IRS imposes income limits on tax-deductible contributions to a traditional IRA, there is no such income limit that applies to after-tax contributions. Thus, high-income taxpayers can make after-tax contributions to a traditional IRA and then convert that money into a Roth IRA.
Even better, high-income taxpayers can make after-tax contributions to a 401(k) plan, as long as their total contribution, including pretax and employer matching contributions, doesn’t exceed the annual IRS limit. Then, these funds can be converted to a Roth 401(k) or IRA.