Maximizing Your Contributions
/I have recently heard some misconceptions about maximizing contributions to employer plans from several different people. The people I’ve spoken with could have missed out on the valuable opportunity to contribute money toward their own retirement accounts and potentially lower their taxable income. So, here is some additional information about contribution limits and how they apply.
In 2022, the annual maximum contribution limit for an employer-sponsored retirement plan (such as a 401k or a 403b) is $20,500. If you are age 50+, you can contribute an additional $6,500 as a catch-up contribution. These two limits apply to employee contributions only. The most common rules that you need to know are 1) your total contributions cannot exceed 100% of your gross income [the amount you make before taxes] and 2) your total contributions [employee plus employer contributions] cannot exceed the limit for defined contributions, which is $61,000 in 2022.
Some employers offer a matching contribution to encourage employees to save for retirement. Matching contributions generally follow a simple formula. For instance, your employer might say they’ll match $0.50 on every dollar up to 5% of your income. This type of employer matching contribution does not count toward your own employee annual contribution limit. As an example, if you are under age 50 and your salary is $100,000 in 2022, you can contribute $20,500 to your 401k plan. If your employer matches contributions at $0.50 on every dollar up to 5% of your income, then their contribution would be $2,500 for 2022. This means your total employee plus employer contributions would be $23,000 in 2022, which is well within the limits for defined contributions.
If you are married, your spouse also works outside the home, and they have the opportunity to participate in their own employer’s retirement plan, then you can each contribute the annual maximum amount to your respective employer plans. The contribution limits are applied on a per person or per employee basis. They are not applied to your household as a whole. Therefore, if each of you are under age 50 in 2022 and your employers each offer the ability to contribute to a 401k or a 403b type of plan, in theory, your total contributions as a married couple could be up to $41,000 this year.
As usual, there are some exceptions to the rules for maximizing contributions into retirement plan accounts, but these exceptions do not apply in most cases. If you’ve received a notice stating you’re ineligible to make the maximum contribution to your employer’s plan or haven’t been contributing the maximum due to being misinformed in the past, be sure to check with your HR department as well as your financial planner or CPA for clarification.
- Margaret Gooley, CFP®, CDFA®, Worley Erhart-Graves Financial Advisors
