IRS Announces Higher 401(k) Contribution Limits For 2022

If you are like me, you live for the IRS to make announcements! Here’s their latest one on 401(k) contributions: The IRS has announced it is increasing employee 401(k) contribution limits for 2022 by the largest amount since 2009 -- woo hoo! 

On Nov. 4, the IRS announced that contribution limits for 2022 will be $20,500, up $1,000 from the cap in 2021. Plan participants ages 50 or older in 2022 can contribute an additional $6,500 in catch-up contributions, which is unchanged from 2021. What does this mean? You can sock more money away for retirement, which is always a good thing!  

The limit on total employer-plus-employee contributions will increase by $3,000, to $61,000 in 2022. That is about three times higher than normal. 

The IRS noted in a story by SHRM that annual increases are based partially on the inflation rate, and inflation has risen more quickly than normal in 2021. The employee contribution limit wasn’t increased at all from 2020 to 2021, for example. 

Here is a snapshot of the changes that take effect on Jan. 1 and how it affects you. 

● Maximum employee elective deferral (age 49and younger): This is how much young people can contribute each year. 

2021: $19,500 

2022: $20,500 

● Employee catch-up contribution (50 and older):As a bonus for those who have traveled more times around the sun, you can add this amount to the maximum that those whippersnappers can contribute.

2021: $6,500 

2022: $6,500 

● Employee-employer defined contribution limit (49 and younger): Even if you have a generous employer 401(k) match, this is the most you can set aside, including the employer’s contribution. 

2021: $58,000 

2022: $61,000 

● Employee-employer defined contribution limit(50 and older, plus catch-up): This amount is higher for the, shall we say, senior age bracket, because of the catch-up contributions they are allowed as they get closer to retirement. 

2021: $64,500 

2022: $67,500 

● Compensation limit: This is for people who make the big bucks. An employer must stop matching salary deferrals once this number is reached. For example, if Mary earns $500,000 and her company’s 401(k) plan matches 5% of her salary, the matching contribution is capped at $15,250 (5% of $305,000). 

2021: $290,000 

2022: $305,000