Raleigh NC Financial Advisor: 2022 Limits & Deadlines
While most of us start preparing our income taxes at the beginning of the year, there are moves you can take now to help relieve your tax burden before the year ends. When it comes to retirement planning there are strategies that can maximize your savings benefits, too.
2022 Contribution Limits and Deadlines
Every year, the IRS sets a dollar amount that you can contribute to your retirement plan. Sometimes the amount increases, sometimes it doesn’t. If you already have an account, hopefully, you’re saving a bit from every paycheck to deposit into it throughout the year.
But there are several retirement plans that the IRS allows you to open and fund to up to the day you file your taxes to count toward this tax year. Your financial advisor or CPA can explain (where applicable) how much of your contribution is tax deductible.
Whether you are employed by a company that offers retirement benefits or self-employed with an individual plan, here’s what you need to know so you can maximize the earning potential of your account.
Traditional and ROTH IRAs
Traditional IRAs must be opened and funded by April 15 of the following year in order to count on current year’s tax return. (I.e., by April 15, 2023 to count for the 2022 tax year).
The annual maximum deposit for both plans in 2022 is $6,000 (or $7,000 if you’re 50 years of age or older, thanks to the catch-up provision).
If you have a traditional IRA, you have the potential to make tax-deductible contributions to that plan.
Roth IRAs don’t allow for tax-deductible contributions, but the income in these plans grows tax free.
There are a few drawbacks to be aware of.
Contribution limitations.
Any withdrawals made before age 59 ½ may incur a 10% penalty on top of the taxes owed.
Required Minimum Distributions start when you reach age 72.
Simple IRAs
The deadline to open a Simple IRA is October 1 in the current year.
Employee compensation deferrals can be made no later than December 31.
Employer contributions must be made by the date of filing your return. If you filed an extension, the employer portion can be extended, as well, but must be made before the date the return is filed.
Employees can contribute up to $14,000 for this year (or $17,000 if you’re 50 or older).
The employer portion is limited to 1-3 percent of an employee’s annual compensation.
All employee contributions made by the business are tax deductible on your business’s tax return.
The downsides of this type of account are:
SIMPLE IRAs can only be implemented at companies with 100 or fewer employees.
Lower contribution limits than a 401(k).
No loans or Roth contributions.
Mandatory employer contributions.
SEP IRAs
You can open and/or contribute to a SEP IRA before you file your tax return.
If you file an extension, you gain even more time to open and fund the account, provided that this occurs before the due date of your tax return. For example, for a 2022 SEP IRA contribution, you have until October 15, 2023 (which is the deadline for all extensions) to open and contribute to your SEP account.
2022 contributions cannot exceed 25 percent of your compensation or $61,000 (whichever amount is less).
Contributions to SEP IRAs made by your business to employees are tax deductible for your business tax return, up to the amount of the employer contribution or 25 percent of compensation—whichever is the lesser of the two. Consult with a tax professional, as this can be somewhat complex to determine.
There are a few disadvantages of SEP IRAs that you should be aware of.
Only allows employer contributions.
Withdrawals before the age of 59 ½ are taxed as ordinary income and subject to a 10% tax penalty.
401(k) Plans
The limit on employee tax-deductible elective deferrals for most 401(k) plans is $20,500 in 2022, rising to $22,500 in 2023.
Participants who are 50 or older at the end of the calendar year can make additional catch-up contributions of up to $6,500 for the 2022 tax year, rising to $7,500 in 2023.
Contributions to a 401(k) are generally due by the end of the calendar year.
Plans may also vary. Contributions for a prior year may not be allowed because an employee is limited to making them through payroll deductions.
There are, however, some challenges with a 401(k) plan.
Most plans have limited flexibility as it relates to investment options.
Fees can be high especially in smaller company plans.
Participants need to monitor and manage their plan over time.
Solo 401(k) Plans
Individual or solo 401(k) plans must be established by your tax-filing deadline plus any extensions.
All contributions (both employee salary deferral and employer profit-sharing matches) must be made by the date you file your return, which includes any extensions.
The annual contribution limit in 2022 for salary deferrals is $20,500 (or $27,000 if you’re 50 or older).
If your plan involves a profit-sharing match, you as the employer, can contribute up to 25 percent of your compensation or 25 percent of your income if you’re self-employed.
Your total salary deferral plus profit sharing match caps out at $61,000, or $67,500 if you’ve reached the age of 50 or older.
Contributions to your solo 401(k) can be made as tax-deferred or post-tax (Roth contributions).
One of the biggest benefits of opening a Solo 401(k) is that it comes with some of the highest contribution limits. However, there are some downsides you should consider.
You will pay taxes and fees for withdrawing the funds early.
You will have to manage your own plan.
HSAs and ESAs
You can make contributions to these accounts through April 18, 2023, to count for 2022.
Health savings accounts have an individual annual contribution limit of $3,650 ($7,300 for families) with a $1,000 catch-up contribution allowed if you’re over 55.
To open an HSA, you must meet specific requirements such as:
Must be at least 18 years old and maintain a high-deductible health plan as your only insurance.
Cannot be enrolled in Medicare (Part A or B) or Medicaid or be claimed as a dependent.
Education savings accounts allow $2,000 maximum contributions per year, per beneficiary.
There are some downsides to ESAs that you need to be aware of:
The investment choices can be limited.
Not all ESAs are the same.
The assets in the ESA can count against you when applying for a financial aid package.
Bottom Line
It’s important to know the contribution limits and deadlines to fund your retirement plan. Depending on the type of account you have, contributions can reduce your taxable income. If you can contribute the maximum to your plan as the IRS allows, you’ll increase your ability to grow retirement savings, as well. It is always a good idea to get guidance from your financial advisor, financial planner or tax professional.
Sources
https://www.investopedia.com/ask/answers/06/salarydeferral401(k).asp
https://www.guideline.com/blog/2022-401k-deadlines-for-plan-sponsors/
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