What are the 401k contribution limits 2022?
To prevent tax avoidance the IRS sets a limit on how much a person can contribute to their 401(k) retirement account. How much did it increase in 2022?
In January, the Bureau of Labor Statistics reported that 149,629,000 non-farm workers were employed in the United States. This is up from a historic low of around 130 million in April 2020 when the pandemic led to major shutdowns and layoffs around the country. As businesses try to attract workers back into the labor force, many have had to increase pay and benefits.
One of the most important benefits that can be offered more workers is a private retirement savings account like a 401(k). A 401(k) falls under the category of a defined contribution plan which is a type of retirement account where "the employee or the employer (or both) contribute to the employee's individual account under the plan." The funds in the account are typically "invested on the employee's behalf." For younger workers, financial planners advise that a higher risk be applied to the investment portfolio and as they get closer to retirement, the level of risk should be lowered.
How much can you put in your 401(k) in 2022?
To prevent tax evasion, the Internal Revenue Service (IRS) puts a cap on the amount of money that can be contributed to a 401(k) each year. The IRS increased the contribution limit by $1,000 to $20,500 for 2022. Another kind of defined contribution plan are Roth IRAs, which allow for taxes to be paid before the funds enter the account, rather than having limit applied when the funds are withdrawn during retirement. A traditional 401(k) allows the account holder to postpone taxation until they take the money out of the account.
What percent of workers have a defined contribution plan?
In 2021, the BLS reported that sixty-one percent of workers had access to a defined contribution plan, up from fifty-four percent in 2011. The average for workers in the private sector was sixty-five percent, whereas those in government were more likely to have access to a defined benefit plan, like a pension.
However, access to these accounts are not available to all workers, and non-unionized and low-income workers are much less likely to be offered a defined contribution plan. In March 2021, the BLS reported that showed that ninety-one percent of workers that formed part of a union were offered a individual retirement account.
For those without a union the rate is thirty percent lower, at sixty-one percent. Similar trends are seen among low-income workers; only forty-two percent of the lowest twenty-five percent of wage earners are offered any type of retirement account, while the rate is around eight-eight percent for the highest twenty-five percent.
This is especially important when considering how social security is not currently structured to be a sole source of income upon retirement. This is because as the Social Security Administration has reported that "Social Security replaces a percentage of a worker’s pre-retirement income based on your lifetime earnings."
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