Reducing your tax bill seems to be one of the biggest motivators for making 401(k) contributions. The good news for 2022, 401(k)-contribution limits have increased. Keep reading as we share five reasons to supercharge your 401(k) contributions in 2022.
Increased 401(k) Contribution Limits for 2022
The contribution limits for the 401(k) plan have increased for 2022. For those looking to max out their 401(k)s in 2022, as employees, you can contribute $20,500—an increase of $1,000. For workers over the age of 50, the catch-up 401(k) contribution is still $6,500 per year.
For business owners, who can contribute as both employee and business owner, 401(k) limits have increased $3,000 to $61,000 per year total. For business owners aged 50 or older, you can also make a $6,500 catch-up contribution. Actual 401(k) contribution limits will depend on your income, the number of employees, and how the 401(k) plan is set up. So, talk with your fiduciary financial planner about setting up your 401(k) properly to maximize the benefits for you and your family.
For business owners reading this who are already maxing out their 401(k), check out the Cash Balance Pension Plan. You could potentially contribute an additional $245,000 pre-tax to this awesome tax-saving retirement plan.
401(k) Contributions Save You Money on Taxes
Contributions to your 401(k) are made on a pre-tax basis, meaning you don’t pay income taxes this year on money put into your 401(k). This can help lower your overall taxes and may even help you qualify for stimulus payments, child tax credits, or drop your income enough to avoid the Obamacare Surtax on investment income. Plus, saving for retirement will help you have a better retirement in the future.
Contributing More Can Help You Retire Earlier
Dreaming of the day work is an option? Contributing more now to your 401(k) can help you reach financial freedom faster. The faster you reach your retirement nest egg goal, the earlier you can potentially retire. Or, perhaps, you can enter your second career following something you are more passionate about. Having retirement savings increases the options available to you.
Get the Full Company Match
If you aren’t contributing enough to your 401(k) to get the full company match, you are essentially flushing money down the toilet. In many cases, your employer will match your 401(k) contributions dollar for dollar up to a certain amount of income. For the average American worker, skipping this step could easily turn into a million-dollar retirement mistake.
The Magic of Compound Interest
With the help of compounding interest, you could become a millionaire over your working life by saving just $140 per month. This is assuming your work from age 22 to age 65 and earn an average of 10% a year on your investments. This gets even easier if you work for a company that provides an employer match and you take advantage of the tax savings of a 401(K) plan. The company match likely cuts your monthly contributions from $140 per month to just $70 per month to become a millionaire. After taxes, you would likely only see your paycheck drop somewhere between $44-63 per month. The drop could be smaller depending on your state income-tax rates.
By comparison, if you wanted to retire a millionaire beginning at age 50, you would need to save around $2,625 per month. Employer match could help lower this amount, but it would likely be a much smaller portion of the total saved than the scenario where you started investing for retirement at age 22.
Wherever you are today, look for ways to increase the amount you are saving for retirement. Supercharge your investment and contributions, and you will be on track for financial freedom before you know it.