No Increase in IRA Limits? Here's How You Can Still Save in 2022.

No Increase in IRA Limits? Here's How You Can Still Save in 2022.

December 01, 2021

If you’re proactive about retirement savings or want to up your savings game this year, you may already know that retirement contribution limits stayed the same for 2022. Here's what you need to know on how you can still save more for retirement.

High earners have a variety of options for saving for retirement—but income limits mean that direct contributions to Roth IRAs may not be among them. Roth IRAs offer tax-free earnings growth and withdrawals in retirement. This makes them a potentially valuable part of a broader investing and tax-planning strategy. Having both Traditional and Roth accounts can help with tax diversification in retirement. Let's break down what this and other recent changes can mean for your retirement plans, whether you’re already saving or just getting started.

Are you getting the most from your 401(k)s?

Maxing out contributions to a traditional 401(k) is a good place to start. These accounts have no income phase-out limits, so you can generally contribute the lesser of your income or $19,500 (plus an additional $6,500 if you are 50 or older).  Pre-tax contributions will reduce your taxable income and in turn, your earnings will grow on a tax deferred basis.

If your employer also offers access to a Roth 401(k), then you could consider using one to set aside some post-tax retirement savings. Like their traditional 401(k) counterparts, Roth 401(k)s don’t have income phase out limits. So even if you don’t qualify for a Roth IRA because your income is above IRS income limits you can make after taxes contributions to a Roth 401(k). Your earnings will grow tax-free, and you will pay no taxes when you take withdrawals after 5 years and over the age of 59½.

The annual contribution limit applies across all of your 401(k) accounts, not on each account individually. The IRS broke down the amount of Roth IRA contributions you can make for 2022. This table shows whether your contribution to a Roth IRA is affected by the amount of your modified AGI as computed for Roth IRA purpose.

If your filing status is...And your modified AGI is...Then you can contribute...
married filing jointly or qualifying widow(er)

< $204,000

up to the limit

married filing jointly or qualifying widow(er)

> $204,000 but < $214,000

a reduced amount

married filing jointly or qualifying widow(er)

> $214,000

zero

married filing separately and you lived with your spouse at any time during the year

< $10,000

a reduced amount

married filing separately and you lived with your spouse at any time during the year
 

> $10,000

zero

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

< $129,000

up to the limit

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

> $129,000 but < $144,000

a reduced amount

single, head of household, or married filing separately and you did not live with your spouse at any time during the year

> $144,000

zero

Amount of your reduced Roth IRA contribution

The IRS stated that If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

  1. Start with your modified AGI.
  2. Subtract from the amount in (1):
    • $204,000 if filing a joint return or qualifying widow(er),
    • $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or
    • $129,000 for all other individuals.    
  3. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year).
  4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
  5. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

See Publication 590-A, Contributions to Individual Retirement Accounts (IRAs), for a worksheet to figure your reduced contribution.

What about non-deductible IRAs?

Does it ever make sense to contribute to a Traditional IRA even if you can’t deduct the contributions? At the very least, you could still enjoy the potential for tax-deferred growth in the account.

You wouldn’t be getting any upfront tax break, and future withdrawal of growth on your original contribution would be taxed at your ordinary income tax rate. It’s possible that the future tax rates you’d pay would be higher than what you would owe if you’d invested in a tax-efficient way in a regular taxable brokerage account. With today’s low long-term capital gains and qualified dividend rates, non-deductible contributions to a traditional IRA may make less sense.

In 2022, long-term capital gains are taxed at a federal rate of either:

  • 0% for single filers with taxable income up to $41,675 or joint filers with taxable income up to $803,350.
  • 15% for single filers with taxable income between $41,675-$459,750 or joint filers with taxable income between $83,351-$517,200.
  • 20% for single filers with taxable income above $459,751 or joint filers with taxable income above $517,201.

It's important to have money in taxable accounts as well as tax-advantaged accounts because it can give you flexibility and access to savings for needs prior to age 59½. At 59½, you can withdraw from traditional IRAs and retirement accounts without a 10% early withdrawal penalty. These methods can also provide flexibility in managing your tax bracket as you plan for post-retirement cash flows. 

What about Medicare Tax?

In addition to the above, filers may have to pay the Medicare surtax.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).

2022 updates

For 2022, an employee will pay:

  • 6.2% Social Security tax on the first $147,000 of wages (6.2% of $147,000 makes the maximum tax $9,114), plus
  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
  • 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2022, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $147,000 of self-employment income, for a maximum tax of $18,228 (12.4% of $147,000); plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
  • 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

Final Thoughts

Contribution limits didn’t increase for the 2022 tax year, but through understanding your contribution limits and future taxes, you can still continue to make good progress toward saving for retirement. Where will your retirement money come from? If you’re like most people, qualified-retirement plans, Social Security, and personal savings and investments are expected to play a role. Once you have estimated the amount of money you may need for retirement, a sound approach involves taking a close look at your potential retirement-income sources. What's more, understanding tax strategies can potentially help you better manage your overall tax situation.

At Agemy Financial Strategies, we have an array of will and retirement and tax planning solutions to guide you through the entire process, all with the help of our trusted financial planners. 

For more information on IRA limits and how you can put your best foot forward in 2022, contact us today!