Planning for retirement is always a challenge. Amassing a sufficient amount of retirement savings is difficult at the best of times.
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What about now, in the midst of the most uncertain times? You can increase your chances of enjoying better growth in your savings in 2022 by understanding the new rules for planning for retirement in 2022.
Retirement planning: take care of the essentials
Of course, take care of the basics too. Do the things you should be doing year after year. “There are a few things you need to do to make sure you’re on track to save solidly for your retirement,” said Kirsten Hunter Peterson, director of the Workplace Thought Leadership team at Fidelity Investments.
Peterson added: “The easiest thing to do is to make sure you don’t leave money on the table.” This means that you should strive to contribute enough to your 401(k) or similar plan to collect the maximum contribution from your employer. Otherwise, you refuse free money.
Another fundamental step in planning for your retirement is saving enough. Fidelity recommends 15% of your salary. This includes any Company correspondence or other Company contributions. If you set aside 10% of your salary and your employer gives you another 5%, you will reach the 15% goal.
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And if you are below this rate? Increase your contribution rate, even if you do so in small annual increments. Even small increases add up.
Increase 401(k) contributions a bit
Suppose you are 45 years old. Your IRA held $63,000 in mid-2021. That was the average for all 45-year-olds with IRAs at Fidelity. Assume your IRA grows an average of 7% per year.
Let’s say you win $60,000. You get 1% salary increases per year and you pocket 6% of your salary per year. You get a 3% match from the company.
What happens? At age 72, your target retirement date, your nest egg would be $849,551.
See what happens if you increase your pension contributions by 1 percentage point per year until you and your employer together earn 15% per year. Then respect this rate until retirement.
At age 72, your nest egg is overflowing with $1.019 million, according to the Bankrate.com 401(k) calculator. This increase of 1 percentage point per year for five years yields a gain of approximately $169,400, or 20%. Not a bad trade. And your dues increases are, in this example, about one-tenth the size of your annual salary increases.
Retirement savings success
But beyond those basics, smart retirement planning requires you to understand the new rules for 2022.
First, you need to keep track of the retirement savings federal tax collectors have their eyes on.
Take the Build Back Better (BBB) spending plan proposed by President Joe Biden. Whether you support or oppose its provisions, the BBB is offering to help pay for itself with several taxes, direct or indirect, on retirement accounts, if the Senate passes the BBB as it currently stands.
A tax would start next year. This would prohibit the use of so-called backdoor Roth IRA conversions. Currently, these conversions allow you to circumvent the prohibition on contributions to a Roth IRA if your income is over $140,000. Now you put the money into a non-deductible traditional IRA. These have no income limit. Then you transfer it to a Roth IRA.
Not according to the new rules. You would no longer be allowed to harbor the money for the rest of your life. Children or grandchildren could no longer inherit it and hold it for up to 10 years. For more details, read this other IBD report.
Retirement planning: understanding the new taxes
Two additional taxes on retirement savings would go into effect, if the Senate also passes them, in 2029. This gives you time to accelerate income in earlier years. That could keep you below the annual income thresholds — $400,000 for single filers and $450,000 for married joint filers, in both cases in adjusted adjusted gross income before deduction — that would make the new rules apply to you.
Another way to deal with the new taxes on retirement savings? “Holding investments in a variety of accounts that get different tax treatment,” said Roger Young, Certified Financial Planner at T. Rowe Price, Senior Director of Retirement Knowledge.
A tax would work like this: If your combined balances in all your IRAs and 401(k)s total $10 million or more, then you won’t be able to make additional contributions.
This income, kept outside of a retirement savings account, would likely be taxable.
The second such tax is more direct. Within one year after your balance reaches this threshold, you will need to withdraw 50% of your money. It would be taxable unless it was in a Roth account.
You would need to clear 100% of the balance if your combined retirement account balances exceeded $20 million.
And don’t think these are potential hassles just for the super rich. “Many middle-class workers become retirement savings millionaires,” said Ed Slott, founder of IRAHelp.com. “Suppose a husband and wife are both working for a living wage. They started saving early in their career. Many end up with $5 million in retirement savings at age 60. They can double that amount shortly.”
Retirement planning:
Rampant inflation is another hurdle you need to keep an eye on. Your best defense? Good retirement planning means making sure your retirement savings include funds that tend to thrive in the midst of inflation. This includes diversified equity funds like an S&P 500 index fund. It also includes funds with TIPS bonds, short-term bonds, commodities, REITs, and cyclical stocks.
For more details, see this other report in this special section.
New contribution limits
Additionally, you should also know which retirement savings accounts have new contribution limits. After all, your goal, whenever possible, is to save as much as possible.
This puts the maximum allowed to work in tax-deferred retirement savings accounts. And it positions you to earn the maximum available contributions from your employer.
Here are the 2022 maximum contributions for key savings accounts:
401(k): $20,500 versus $19,500 in 2021.
401(k) catch up: $6,500, unchanged from 2021.
Traditional or Roth IRA: $6,000, unchanged.
Traditional catch-up or Roth IRA: $1,000, unchanged.
For more details on 401(k) contributions Where IRA contributions, see these other IBD reports. Or see IBD’s special report on Boost your retirement.
Health Savings Accounts (HSA): stand-alone coverage, $3,650 versus $3,600 in 2021; family coverage, $7,300 compared to $7,200 in 2021.
2022 vs. Maximum 401(k) contribution limits for 2021
| Year | Basic contribution limit | Catch-up contribution (50 years or more) |
|---|---|---|
| 2022 | $20,500 | $6,500 |
| 2021 | $19,500 | $6,500 |
| 2020 | $19,500 | $6,500 |
| 2019 | $19,000 | $6,000 |
| 2018 | $18,500 | $6,000 |
| 2017 | $18,000 | $6,000 |
| 2016 | $18,000 | $6,000 |
| 2015 | $17,500 | $6,000 |
| 2014 | $17,500 | $5,500 |
| 2013 | $17,000 | $5,500 |
| 2012 | $16,500 | $5,500 |
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for advice on retirement planning and active mutual fund managers who consistently outperform the market.
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