With inflation rates hitting a 40-year high, it’s more important than ever that those saving up for retirement understand how they can stretch their investments.
The US Treasury Department recently announced inflation-adjusted figures for retirement account savings for 2022. Understanding these changes and translating them into the right investment planning can help maximize the benefits for retirement plan participants.
Here’s a ‘what’s really changed’ guide for 2022…
The extra grand
Taxpayers can now put an extra $1,000 into their 401(k) plans as the IRS announced that the 2022 contribution limit for 401(k) plans would increase to $20,500 for employees. For business owners, who can contribute as both employee and business owner, it has increased by $3,000 to $61,000 per year. It’s a fact that contributing more to your 401(k) can help participants reach their retirement nest egg faster.
Child tax credit drops
Last year, President Joe Biden’s American Rescue Plan Act expanded the Child Tax Credit for one year, providing most working families with $3,000/child under 18 years and $3,600/child younger than six years. The plan, which made the credit fully refundable, was called the largest US child tax credit ever. However, for the 2022 tax year, the child tax credit has reverted to its pre-2021 form, which means the credit amount has dropped to $2,000 per child.
Tax bracket gets wider
On account of the inflation during the 12 months from September 2020 to August 2021, the income tax brackets for 2022 are now wider. Though the tax rates are the same for both years, the brackets have been adjusted to account for inflation. For instance, the standard deduction for married couples filing jointly for the tax year 2022 has risen to $25,900, which is $800 more than last year. For single taxpayers and married individuals filing separately, the standard deduction is now $12,950, up by $400.
No change in tax rates on capital gains
Tax rates on long-term capital gains and qualified dividends remain status quo, but the income thresholds to qualify have been adjusted, taking inflation into account. In 2022, the 0% rate applies to individual taxpayers with taxable income up to $41,675 on single returns (it was $40,400 for 2021).
The good news for retirees is that the IRS’s updated table to calculate required minimum distributions to account for longer life expectancies would mean that apart from the maximum contribution limits for 401(k), 403(b), and 457, jumping from $19,500 to $20,500 for 2022, people born before 1973 can once again put in $6,500 more as a “catch-up” contribution. The 2022 cap on contributions to SIMPLE IRAs is $14,000 ($13,500 in 2021), plus an extra $3,000 for people older than 50.
Claiming saver’s credit
It looks like more lower-income people may be able to claim the “saver’s credit” in 2022. This tax break may be worth $1,000 for single filers and $2,000 for joint filers. Here participants must contribute to a retirement account and their adjusted gross income must be below a certain threshold to qualify.
At Congruent Solutions, we understand the strategizing that goes into prudent retirement planning and specialize in value-added and intuitive technology solutions to help manage, administer and maintain retirement plans. If you’re a plan provider, give us a call today to understand how to increase operational efficiencies securely and seamlessly.