Here’s a simple investing and planning tip for the new year. If your employer offers a 401(k)-retirement savings plan, join the plan. If you are already in the plan but are not yet maximizing your contributions, increase your salary deferral at least 1%.
If you can afford to forego more money today to save for retirement, bump up your 401(k) contributions to the maximum this year (see more about 2022 limits below).
Also, don’t be “fooled” by a company match. What do I mean by that? Let’s look at an example where an employer matches employee contributions dollar for dollar up to 3% of salary. In this example, some employees think they should limit their 401(k) contribution to the 3% match. Why? Even if your employer provides no match at all, you can still contribute up to the maximum. All the money you save into a 401(k) is always your money, not the company’s. If you can afford to save more, the tax-deferred 401(k) is a good vehicle for long-term retirement savings.
Are you worried about higher tax rates in the future? If so, and if your company offers a Roth 401(k) plan, consider re-directing your 401(k) savings contributions from the traditional pre-tax 401(k) to the post-tax Roth 401(k). Just like a Roth IRA, a Roth 401(k) enjoys tax-free growth and tax-free withdrawals upon reaching 59 ½ years of age and at least five years in the Roth.
A distinct advantage of a Roth 401(k) is that contributions are not subject to the same income thresholds as a Roth IRA. Therefore, higher earning individuals and married couples may be able to contribute to a Roth 401(k) even if they surpass the income limits for eligibility to contribute to a Roth IRA. See a 2022 tax reference chart here and talk to you tax professional for more details.
Each year the IRS publishes updated tax related rates and thresholds. Some thresholds can only be changed by new legislation, whereas some are automatically indexed to somewhat keep pace with inflation. One item indexed up every year or two is the annual salary deferral 401(k) plan maximum contribution level (see IRS details here).
For calendar year 2022, employees participating in a company sponsored 401(k) plan may be eligible to save a maximum of $20,500 under age 50 and an additional $6,000 ‘catch-up’ if over age 50. (Note: Some individual company 401(k) plans may cap contributions of their highly compensated employees below the IRS allowed maximum due to ADP/ACP plan testing requirements).
This material is provided by Schmitt Wealth Advisers for informational purposes only. Schmitt Wealth Advisers does not provide tax or legal advice, and nothing herein should be construed as such. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Schmitt Wealth Advisers are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from publicly available sources (unless otherwise noted) and are believed to be reliable. Schmitt Wealth Advisers, however, cannot guarantee the accuracy or completeness of such information. Past performance may not be indicative of future results.