Lowering your tax bill seems to be one of the main motivations for making 401 (k) contributions. The good news for 2022, 401 (k) contribution limits have increased. Read on as we share five reasons to overload your 401 (k) contributions in 2022.
Increase in 401 (k) contribution limits for 2022
Contribution limits for the 401 (k) plan have increased for 2022. For those looking to maximize their 401 (k) in 2022, as employees you can contribute $ 20,500, an increase of $ 1,000 . For workers over 50, the 401 (k) catch-up contribution is still $ 6,500 per year.
For business owners, who can contribute both as an employee and a business owner, the 401 (k) limits have increased from $ 3,000 to $ 61,000 per year in total. For business owners 50 and over, you can also make a catch-up contribution of $ 6,500. The actual 401 (k) contribution limits will depend on your income, the number of employees and how the 401 (k) plan is set up. So, discuss with your financial fiduciary planner the proper setup of your 401 (k) to maximize the benefits for you and your family.
For business owners reading this and already maxing out their 401 (k), check out the Cash Balance Retirement Plan. You could potentially contribute an additional $ 245,000 before tax to this great tax-saving pension plan.
401 (k) contributions save you money on taxes
Contributions to your 401 (k) are made on a pre-tax basis, which means you pay no income tax this year on the money put into your 401 (k). It can help you lower your overall taxes and may even help you qualify for stimulus payments, child tax credits, or reduce your income enough to avoid the Obamacare surtax on investment income. Plus, saving for retirement will help you have a better retirement in the future.
Contributing more can help you retire earlier
Dreaming of daytime work is an option? Contributing more to your 401 (k) now can help you achieve financial freedom faster. The sooner you reach your retirement nest egg goal, the sooner you can potentially retire. Or, maybe, you can go into your second career after something you’re more passionate about. Having retirement savings increases your options.
Get the full business match
If you don’t contribute enough to your 401 (k) to get the full business consideration, you’re essentially throwing money down the toilet. In many cases, your employer will match your 401 (k) contributions dollar for dollar up to a certain amount of income. For the average American worker, skipping this step could easily turn into a million dollar retirement mistake.
The magic of compound interest
With the help of compound interest, you could become a millionaire in your working life by saving just $ 140 per month. This assumes you are working from 22 to 65 and earning an average of 10% per year on your investments. It becomes even easier if you work for a company that offers an employer match and take advantage of the tax savings of a 401 (K) plan. The business match probably cuts your monthly contributions from $ 140 per month to just $ 70 per month to become a millionaire. After taxes, you would probably only see your paycheck drop between $ 44 and $ 63 per month. The decrease may be smaller depending on your state’s income tax rates.
In comparison, if you wanted to retire from being a millionaire starting at age 50, you would need to save around $ 2,625 per month. Matching with the employer could help reduce that amount, but it would likely be a much smaller portion of total saved than the scenario where you started investing for retirement at age 22.
Wherever you are today, look for ways to increase the amount you save for retirement. Boost your investment and contributions, and you’ll be on your way to financial freedom before you know it.