401k contribution limits for 2022 are $20,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.
What is 401k?
A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return.
Tax advantages
Two of the tax advantages of sponsoring a 401(k) plan are:
**Employer contributions are deductible on the employer’s federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.
**Elective deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.
There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.
Tax-deferred 401k
Most employees, typically, choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.
Roth 401k
Roth 401k contributions are pretax. It means that you will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.
What are my 401k contribution limits for 2022?
Employees can contribute up to $20,500 to their 401(k) plan for 2022, a $1,000 increase from 2021.
Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2022, the same amount as 2021
The employee compensation limit for calculating 401k contributions is $305,000, $15,000 more than 2021
Companies can make a matching contribution up to the combined limit of $61,000 or $67,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $40,500 in 2022.
Solo 401k contribution limits 2022
A solo 401k plan is a type of 401k plan with one participant. Those are usually solo entrepreneurs, consultants, freelancers, and other small business owners. Self-employed individuals can take advantage of solo 401k plans and save for retirement.
The maximum contribution limit in 2022 for a solo 401k plan is $61,000 or $67,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2021.
Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021.
The total self-employed compensation limit for calculating solo 401k contributions is $290,000.
Employer contribution cannot exceed 25% of the compensation
If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.
Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.
