What’s the 401(k) Maximum for People Over 50?

The IRS has increased the 401(k) maximum contribution for 2022, but you still need to watch out for excess savings to avoid unnecessary tax burden.

Ruchi Gupta - Author

Dec. 16 2021, Published 9:04 a.m. ET

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The 401(k) is a powerful retirement savings plan that you should take advantage of if it’s available to you. The IRS sets the 401(k) maximum contribution you can make in a year. It reviews the limit regularly and has announced increases in recent years. What’s the 401k maximum in 2022?

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Retirement can be fun or frustrating, depending on how you planned for it. To avoid financial stress in retirement, it would help to start contributing to a pension account as early as possible and save as much as you can. You have many ways to save up for retirement, with IRAs and 401(k)s being among the common pension plans.

How does the 401(k) retirement savings plan work?

The 401(k) is named after the tax code that established it. The 401(k) is an employer-sponsored pension plan. You contribute a portion of your paycheck into the plan, and the company you work for may match it up to a certain limit. The funds you put into the account can be invested in stocks, bonds, mutual funds, or even Bitcoin to grow the savings over time. You may have the opportunity to choose where to invest your 401(k) savings.

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Is 401(k) taxed?

Taxes are a problem for everyone. The crypto community was up in arms after Congress passed Biden’s infrastructure spending plan with worrying crypto tax provisions, prompting some investors to consider migrating to where crypto isn’t taxed. The good news is that 401(k) contribution is taken out of your paycheck before taxes. Additionally, your money in the plan grows tax-free—you only pay taxes on the 401(k) withdrawals.

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Because 401(k) contributions are taken from your paycheck before taxes, your taxable income is also reduced. That could place you in a lower tax bracket and let you take home more money.

The 401(k) maximum is increasing 2022

The IRS has increased the 401(k) contribution limit for 2022 to $20,500. The contribution was capped at $19,500 in 2021 and 2020, up from $19,000 in 2019. For people over 50 years, the IRS has offered them a higher limit to help them catch up in retirement savings. They’re allowed to contribute up to $6,500 above the standard limit, meaning they can fund their 401(k) accounts up to $27,000 in 2022.

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In a 401(k) plan, the company may offer a partial or full matching of your contribution but only up to 6 percent of your paycheck. Bear in mind that while the IRS allows you to contribute up to $20,500 to a 401(k) plan in 2022, your employer may have a lower contribution limit. Moreover, some companies skip the 401(k) matching and instead offer other benefits such as stock awards.

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What happens if you put too much into 401(k)?

If you’re working hard to fund your retirement account, you may end up over contributing to a 401(k) plan. The rule is that you should get the excess contribution out of your 401(k) account as soon as possible. The IRS allows you up to April 15 of the following year to do that or bear a tax burden. If you fail to pull out the money before the deadline, the IRS may tax the excess amount twice.


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