What are the Catch-Up Contribution Limits for Retirement Plans in 2022?

Most Americans spend their lives working hard and saving for their retirement years. Retirement is a time when they can enjoy their life, travel, pursue hobbies, and reconnect with their loved ones. They can learn new skills for their own pleasure rather than for professional gains. Most folks do not foresee working in their retirement or having a part-time job to meet their expenses. Thus, it is advised that to boost your chances of being financially independent during the non-working years of your life, you should consider saving and creating a large retirement corpus for yourself.

There are multiple retirement accounts available such as the individual retirement account (IRA), 401(k), health savings account (HSA), thrift savings plan, etc that you can choose from based on your financial situation and needs. Not only do these accounts provide you with security and flexibility but they also offer a reliable option to grow your money. If you wish to learn about the many tax benefits of saving in these accounts to maximize your funds, consider reaching out to a professional financial advisor who can advise you on the same.

The advisor can also guide you on the various rules, restrictions, and limitations pertaining to the withdrawal and contribution of money to these retirement accounts. Withdrawal of funds is subject to certain age limitations and uses that vary from one account to another. The Internal Revenue Service (IRS) also places restrictions on contributions limits to retirement accounts that are revised annually.

Below, we will discuss the catch contribution limits for various retirement plans in 2022:

What is meant by a catch-up contribution?

The IRS determines a contribution limit based on which an individual can save a certain amount of money in a retirement plan in a year. However, this general limit is superseded by an extended limit offered to individuals above the age of 50. This is known as the catch-up contribution limit.

Catch-up contributions allow people to save more for retirement and make up for any shortfall in their retirement corpus. Due to the fast-approaching retirement years, you may wish to save more and maximize your savings in the limited number of working years you have got left.

What are the 2022 catch-up contributions for each retirement account?

The 2022 catch contribution limits for each retirement account are as follows:

1. 401(k) retirement account

A 401(k) is a tax-advantaged employer-sponsored retirement plan where you contribute pre-tax dollars to lower your federal tax bill for the year.

The catch-up contribution limits for a 401(k) retirement account are:

Year

Standard contribution

Catch up contribution

2021

$19,500

$6,500

2022

$20,500

$6,500

2. Traditional IRA

A traditional IRA or individual retirement account is a retirement plan wherein you can contribute your pre-tax income and grow your funds tax-deferred. Since you do not pay any tax at the time of contribution, your withdrawals are taxed as per your current income after the age of 59.5.

The catch-up contribution limits for a traditional IRA are:

Year

Standard contribution

Catch up contribution

2021

$6,000

$1,000

2022

$6,000

$1,000

3. Roth IRA

A Roth IRA is an individual retirement account wherein you contribute after-tax dollars to earn tax-free returns on your money. You can also make tax-exempt withdrawals in retirement subject to fulfillment of some conditions.

The catch-up contribution limits for a Roth IRA are:

Year

Standard contribution

Catch up contribution

2021

$6,000

$1,000

2022

$6,000

$1,000

4. SIMPLE IRA

A SIMPLE IRA is a tax-deferred retirement savings plan that can be used by small businesses having 100 or fewer employees.

The catch-up contribution limits for a SIMPLE IRA are:

Year

Standard contribution

Catch up contribution

2021

$13,500

$3,000

2022

$14,000

$3,000

5. Health savings account (HSA)

A Health Savings Account (HSA) is a tax-advantaged account that can be used to save for qualified medical expenses.

The catch-up contribution limits for an HSA in 2022 are:

Type of coverage

Self only

Family coverage

Standard contribution

$3,650

$7,300

Catch up contribution

$1,000

$1,000

6. 403(b) retirement account

Primarily designed for the employees of some public schools and other tax-exempt organizations, the 403(b) is a retirement plan used by qualified teachers, librarians, school administrators, nurses, doctors, professors, and government employees. Herein, the catch-up contribution limits are not the same for all individuals investing in the account.

The limits are determined on the basis of several factors. These are:

To be eligible to make a catch-up contribution, you must have worked for the same employer for at least 15 years. In addition, the amount shall not exceed:

  • $3,000
  • $15,000 minus the total amount of the number of catch-up contributions made in the previous years.
  • $5,000 times the total number of years that you have worked for your employer, minus the total catch-up contributions made in the previous years.

Do note that the maximum contribution that can be made to a 403(b) retirement account by both the employer and the employee cannot exceed $61,000 (for 2022) or your total compensation, including benefits, for your most recent year of service.

7. 457(b) Plan

Majorly used by state and local government employees, an investor can make a catch-up contribution three years before the year of their retirement in a 457(b) plan. Individuals contributing to a 457(b) plan must adhere to the following rules when making a catch-up contribution:

The catch-up contribution should be less than the following:

  • Twice of the annual contribution limit i.e. up to $41,000.
  • $20,500 plus the basic annual limit ($20,500) left unused in previous years.

Since employer-matched contributions count toward the maximum contribution limit, your total contribution cannot exceed $20,500. This means that if your employer contributes $10,500 to the plan, you can only contribute $10,000 before you hit the maximum contribution ceiling.

8. Thrift savings plan (TSP)

Open to only federal employees and members of the uniformed services, a thrift savings plan is similar to a 401(k) plan where they receive similar benefits available to those working in the private sector.

The catch-up contribution limits for a TSP are:

Year

Standard contribution

Catch up contribution

2021

$19,500

 $6,500

2022

$20,500

 $6,500

How are catch-up contributions beneficial for investors?

There are several benefits of catch-up contributions such as:

  • Increased savings: By making catch-up contributions, you can boost your retirement savings substantially. If you are nearing retirement but do not have enough money saved up, catch-up contributions can help you save additional funds to secure your retirement. For example, if you make the full catch-up contribution of $6,500 each year for a total of 10 years after reaching 50 years of age, you can save a total of $65,000. Added to your pool of retirement savings, it can help you stay afloat for a reasonable period of time.

  • Increased tax savings: Making catch-up contributions can be a great way to augment your tax savings. If you maximize your contributions to your retirement plan, you can lower your taxable income for the year. By doing so you would be taxed in a lower tax bracket allowing you to increase your savings while reducing your tax expenses in the present.

  • Evaluation of your retirement needs: By making catch-up contributions you stay on top of your retirement planning needs. Doing so allows you to reassess your needs and if needed, make timely changes to ensure that you are on course for meeting your retirement savings goals.

  • Matching of your contribution by your employer: As a lot of employers match their employee’s contribution to their retirement plans, by making catch-up contributions you can likely earn more if your employer matches your contributions.

How can you make catch-up contributions?

To be able to make catch-up contributions, you must reach out to your plan administrator or employer (if you have invested in an employer-sponsored retirement plan). You can make catch-up contributions online to your retirement account provided you meet the qualification criteria for the same.

What should you keep in mind when making catch-up contributions?

You must pay heed to the following when making a catch-up contribution:

  • The IRS determines the catch-up contributions. They are not set by your employer.
  • Investors who are 50 years of age or older are solely eligible for making catch-up contributions.
  • Since contribution limits are revised quite regularly, it is advisable to stay up to date on the latest limits to ensure you do not miss out on any benefits.

To summarize

By making catch-up contributions, you not only boost your savings but also your taxability. They are helpful for building a large retirement corpus to meet your expenses in retirement. As most retirement plans offer this benefit, you can choose the one that best fits your needs and contribute to the same. But you need to be careful about staying up to date with the contribution limits as the IRS revises them from time to time.

To get in touch with a fiduciary advisor who may help you understand the benefits of maximizing your contribution limits and reaching your retirement savings targets, use the free advisor match service. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.

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