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Inflation Not All Bad: Retirement Savings Limits are Going Up!

Inflation remains in the news with prices going up - you've heard this all before. But there is some positive news on inflation:

The IRS will be increasing the contribution limits for many retirement savings plans. Be ready to adjust your contributions accordingly.

For 2022, 401(k)s, 403(b)s, most 457 plans, and the Thrift Savings Plan for government employees and the armed services will see an increase to $20,500, from $19,500. The catch-up provision for savers 50 and above remains the same, $6,500, for a total of $27,000.

Add to Savings with an IRA

Even though IRA contribution levels didn't go up, the phase-out ranges did get a cost-of-living bump. These determine if and how much of your Traditional IRA contribution is tax-deductible, and if you can contribute to a Roth IRA.

For 2022, the phase-out ranges for a tax deduction are as follows:

  • 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 to $129,000 (up from $105,000 to $125,000). Covered single filers: $68,000 - $78,000 (up from $66,000 - $76,000).

  • 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 to $214,000, up from $198,000 to $208,000.

Even if you can’t get a tax deduction, you are allowed to put additional money into an IRA when you max out your employer-sponsored plan. It's still a great way to build retirement savings, without adding to your tax burden. This is called a non-deductible IRA contribution, and it grows tax-free until withdrawn.

Five Star Tip: - you are responsible for notifying the IRS that you’ve made an after-tax contribution. You do this by filing Form 8606. You also need to keep careful records, or you may end up getting knee-capped with double-taxation when you withdraw funds in retirement!

For 2022, the income phase-out ranges for contributing to a Roth IRA is as follows:

  • For married filing jointly: $204,000 - $214,000 (up from $198,000 - $208,000).

  • For single filers: $129,000 - $144,000 (up from $125,000 - $140,000).

If you're below the thresholds, you can contribute fully to a Roth. If over, you cannot contribute. If you're in the middle your contribution is reduced.

The Spousal IRA

Whether you are eligible to take a tax deduction or not, if one spouse doesn’t have earned income it can make sense to set up a spousal IRA. This is just a regular IRA account held in the name of the spouse. Contributions are based on the working spouse' income. The IRS normally requires income for each person to contribute to an IRA, but the spousal IRA is the exception.

You can contribute up to the annual limit and plus make the catch-up contribution if you're over 50. These are unchanged from 2021 at $6,000 and $1,000, respectively. Continuing to contribute during periods when one spouse is not working will keep your retirement plan on track. It may not be real easy, but do it if you can. Analyzing your income and expenses can help with this.

The Takeaway

Inflation is helping retirement savings limits and phase-out ranges on deductions to go up. Take advantage of it. Review your budget and adjust your payroll contributions accordingly. Any increase in salary or decrease in expenses, like debt, might allow you to increase your retirement contributions. This keeps the amount you save current with your income and you'll be glad you did it.

John Piershale, CFP®, AEP®

John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.

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