The IRS Has Raised 401(k) Contribution Limits for 2022

For American workers wishing to prepare for retirement, the 401(k) is somewhat of the gold standard. In a 401(k) plan, an employer-sponsored retirement account, employees may choose to contribute a portion of their salary to the account, and employers may also match a portion of those contributions. What are the current and future 401(k) contribution limits?

The IRS governs how much workers are allowed to save in 401(k) plans, just as it limits the contributions toward similar accounts, such as 403(b) and most 457 plans. 401(k) plans offer significant tax benefits, typically through reducing the account holder's taxable income during the contribution year.

For 2020 and 2021, the IRS limited how much anyone could put into a 403(b) to $19,500. On Nov. 4, 2021, the agency announced it would raise the maximum 401(k) contribution for 2022, to $20,500. Another 401(k) change for 2022 is that the total maximum contributed by both employees and employers was raised by $3,000, to $61,000.

For workers aged 50 or older, the 401(k) contribution limits each year are higher to enable older workers to “catch up” on retirement savings. This amount is unchanged in 2022, and is staying at $6,500 per worker over 50. This means your total 401(k) contribution limit for 2022 is $27,000 if you're at least 50 years old.

Employees elect to have a specific amount or percentage of their salary deducted from their gross income if they have a traditional 401(k). These accounts effectively lower your taxable income during that year, and you only pay taxes on the contributions (and related earnings) upon withdrawal at retirement age.

Some companies also offer a Roth 401(k), which functions similarly to a Roth IRA. A Roth 401(k) also deducts money from your paycheck to be invested until retirement. However, a Roth 401(k) takes contributions after taxes have been deducted. This means that although you don’t receive a tax benefit in the contribution year, you don’t pay taxes on the contribution or earnings when withdrawn.

In March 2022, the U.S. House of Representatives passed a bill intended to improve retirement planning for workers. CNBC reported that the Secure a Strong Retirement Act passed with several provisions to benefit people saving for retirement. The bill still needs to pass the Senate before potentially becoming law.

Provisions of the bill include:

• Employers would be required to enroll employees automatically in 401(k) plans at 3 percent of their salary, increasing annually until reaching 10 percent. (Employees could change these amounts or opt out.) However, businesses less than three years old or with 10 or fewer employees would be exempt.

• An increase in the catch-up contribution maximum, to $10,000 (for those aged 62–64 beginning in 2024).
• An increase in the age when savers would have to take required minimum distributions (RMDs).

• Starting in 2023, employees could elect to have employer matching contributions deposited into a Roth 401(k) rather than pre-taxed accounts.
• Creating a national database to enable people to reclaim lost retirement accounts.