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How Much Can You Save for Retirement?

Funneling money into a tax-advantaged account, such as an IRA or a 401(k) is a must if you’re banking on enjoying a comfortable retirement. These kinds of accounts offer a much higher rate of growth compared to a regular savings account. However, there’s a catch when it comes to how much you can save each year. The IRS routinely adjusts the annual retirement contribution limits for qualified retirement accounts. A financial advisor can help create a retirement strategy for your needs. Here are the latest contribution limits for the 2021 and 2022 tax years.

Contribution Limits for Employer-Sponsored Plans

Retirement plans offered through your employer can either be defined benefit plans, such as a pension, or defined contribution plans, like a 403(b), 457 or 401(k) plan. If you’re enrolled in any of the above, you can defer up to $19,500 of your salary into your account for 2021 and $20,500 for 2022. The maximum 401(k) contribution limit also applies to federal employees who participate in the Thrift Savings Plan. This cap doesn’t include employer matching contributions.

Although your company match is not included in maximum 401(k) contribution limits, the IRS does cap the total sum of your contributions and your employer’s contributions. For 2021, that cap is the lesser of either 100% of employee compensation or $58,000. For 2022, the cap is the lesser of either 100% of employee compensation or $61,000. Note that these caps don’t include catch-up contributions, which can be up to $6,500 for those 50 or older.

Defined benefit plans pay you a set amount of money once you retire based on your annual salary and how many years of service you’ve racked up. Because of the cost involved, fewer companies offer defined benefit plans than once before.

Contribution Limits for Self-Employed Savers

How Much Can You Save for Retirement?

When you own a business or you work as an independent contractor, you have to think outside the box a little in terms of how you can save for retirement. Two of the most common options available are SEP and SIMPLE IRAs. Which one you choose depends on your business structure and whether you have any employees, but generally, both plans offer more benefits than you’d get with a traditional IRA. For 2021, you can contribute a maximum of $58,000 in a SEP IRA or $13,500 in a SIMPLE account. Those limits rise to $61,000 and $14,000 in 2022, respectively.

If you own a sole proprietorship or your only employee is your spouse, a solo 401(k) may also be a good choice. The 2021 and 2022 contribution limits are the same as a SEP IRA and your contributions grow on a tax-deferred basis.

Limits for Traditional and Roth IRAs

An IRA is an excellent choice for supplementing the amount you’re saving in an employer’s plan or building your nest egg when you’re not eligible to participate in a retirement plan at work.

With a traditional IRA, you get the benefit of deferring taxes on earnings and your contributions may be deductible. You fund a Roth IRA with after-tax dollars, which means you’ll pay no tax on qualified withdrawals. For both 2021 and 2022, the most you can put into either a traditional IRA or Roth IRA is $6,000, plus a $1,000 catch-up contribution if you’re 50 or over.

Catch-Up Contribution Limits

How Much Can You Save for Retirement?

In terms of saving for retirement, you’re better off starting sooner rather than later. However, the IRS recognizes that some people may put it off longer than others. In addition to regular contributions, certain savers can make catch-up contributions to boost their balances. The permitted amount of the catch-up contribution varies based on what kind of retirement account you have.

For defined contribution plans, such as a 401(k), you can chip in an extra $6,500 in 2021 if you’re 50 or older. You can’t make catch-up contributions to a SEP IRA, but you can squirrel away an additional $3,000 to a SIMPLE plan if you’re 50 or older. If you’ve got a solo 401(k), the catch-up limit is $6,500.

Income Phase-Out Limits

Your ability to deduct your traditional IRA contributions depends on how much you earn.

If you have a traditional IRA and you participate in your employer’s retirement plan in 2021, the deduction phases out if your modified adjusted gross income ranges (MAGI) is between $66,000 and $76,000. Meanwhile, the deduction phases out when your MAGI is between $105,000 to $125,000 if you’re married and file jointly. If you’re married and you don’t have an employer-sponsored plan but your spouse does, your phase-out limit is between $198,000 and $208,000.

In 2022, the deduction phases out if you’re single and your MAGI is between $68,000 to $78,000. For married couples filing jointly, your deduction is phased out when your MAGI falls between $109,000 and $129,000. If you are not covered by a workplace retirement plan but your spouse is, your deduction phases out if your MAGI is between $204,000 and $214,000.

Savers who are planning to fund a Roth IRA also need to be aware of adjustments to the income cap. In 2021, if you’re single or the head of your household and your MAGI is between $125,000 and $140,000, you may make a reduced contribution to a Roth IRA. The same applies to married couples filing jointly with a MAGI between $198,000 and $208,000.

In 2022, income phase-outs apply if you’re single or the head of your household with a MAGI between $129,000 and $144,000. The income phase-applies to married couples filing jointly with a MAGI between $204,000 and $214,000.

Scoring the Saver’s Credit

As an incentive to get more people to save for retirement, the IRS offers a special credit for people who make below a certain amount and contribute to an employer’s plan or IRA.

In 2021, the credit is good for 50% of your contribution at the following income levels: single filers who earn $39,500 or less, heads of household making $29,625 or less and married couples who file a joint return that make $19,750 or less.

In 2022, the credit is worth 50% of your contribution at the following income levels: single filers who earn $41,000, heads of household who earn $30,750 and married couples who file a joint return that make $20,500 or less.

Tips for Saving for Retirement

  • Industry experts say that people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Maximize your employer’s 401(k) match, if one is offered. As illustrated by SmartAsset’s 401(k) calculator, employer contributions can seriously boost the value of your 401(k) over time. For instance, if your employer will match 50% of employee contributions up to 5% of your salary, you could snag $1,250 in employer contributions if you contribute $2,500 and earn $50,000 a year.
  • Consider your options. As indicated by the many contribution limits, you have numerous choices when it comes to saving for retirement. Do your research to make sure you’re making the best choice for your needs. Here’s a breakdown of IRAs vs. 401(k)s.
  • If you’re over the age of 50, take advantage of catch-up contributions. Catch-up contributions are a great way to boost your savings, whether you got a late start or haven’t saved as much as you’d hoped. Use SmartAsset’s retirement calculator to ensure you’re saving enough to retire comfortably.

Photo credit: © iStock/AnthonyRosenberg, © iStock/mediaphotos, © iStock/winhorse

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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