The IRS released updated 2022 annual limits for retirement plans and Individual Retirement Accounts (“IRAs”). These limits, which are updated each year, impact all retirement plans (both defined contribution and defined benefit) and IRAs (both Traditional and Roth) and are crucial in plan administration and proper tax reporting. The following summary highlights some of the changes for 2022.
Retirement Plan Limits
|2022 Limit||2021 Limit||Change|
|Maximum Salary Deferral Contribution (Age 49 and younger)||$20,500||$19,500||+$1,000|
|Annual Catch-up Contribution Limit (Age 50 and older)||$6,500||$6,500||No Change|
|Defined Contribution Maximum Limit||$61,000||$58,000||+$3,000|
|Defined Benefit Plan Maximum Limit||$245,000||$230,000||+$15,000|
|Annual Compensation Limit for Calculating Contributions||$305,000||$290,000||+$15,000|
|Highly Compensated Employee Limit for Non-discrimination Testing||$135,000||$130,000||+$5,000|
Individual Retirement Account (“IRA”) Limits
IRA deduction and contribution rules operate differently. For Traditional IRAs, taxpayers can deduct contributions up to the maximum limit if certain conditions are met. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or “phased out” until it is eventually eliminated. The reduction depends on the taxpayer’s filing status and income. However, if neither the taxpayer nor the spouse is covered by a retirement plan at work, then the phase-out do not apply. Below are highlights of the 2022 changes:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to $68,000 – $78,000. For 2021, the phase-out range was from $66,000 – $76,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 – $129,000. For 2021, the phase-out range was from $105,000 to $125,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered , the phase-out range is increased to $204,000 – $214,000. For 2021, the phase-out range was $198,000 – $208,000.
Since contributions to a Roth IRA are after-tax, the contribution limits operate differently. Here, the phase-out range reduces the total contribution that a taxpayer can make to a Roth IRA (as opposed to simply limiting deductibility). For 2022, the income phase-out ranges for Roth IRAs are as follows:
- For single filers and heads of households, the phase-out limit is increased to $129,000 – $144,000. For 2021, the phase-out range for this group was $125,000 – $140,000.
- For married couples filing jointly, the income phase-out limit is increased to $204,000 – $214,000. For 2021, the phase-out range for married couples filing jointly was $198,000 – $208,000.
Contribution Limits that Remain Unchanged
Finally, there were some limits that did not change from 2021. As noted in the chart above, the annual catch-up limit for Participants 50 years and older remained the same at $6,500. Similarly, the maximum IRA annual contribution limit stayed at $6,000.
Ultimately, it is vital that both plan sponsors and taxpayers understand the various contribution limits when managing and contributing to retirement plans and IRAs. If a plan sponsor fails to abide by these limits, it could impact the tax qualification status of the plan. On the other hand, taxpayers that ignore these limits could be subject to a 6% excess contribution penalty.