In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the 2022 IRA and 401(k) contributions limits and other changes for the year, which is the first thing you should consider before you can invest.
Happy New Year everyone. 2022 has arrived and it’s time to get a handle on the new IRA and 401(k) contribution numbers you need to know. Hey everyone, Adam Bergman here, tax attorney, founder of IRA Financial, and this is the first Adam Talks podcast of 2022. So I want to wish everyone a happy, healthy and prosperous New Year.
So before we could start thinking about investments and strategies for self directed retirement accounts for the 2022 taxable year, I thought it would be a really good idea to have a podcast and just focus on what numbers you need to know about when it comes to the 2022 IRA and 401(k) contribution numbers. So I’ll start with the traditional and Roth IRA because it’s the easiest. There are no changes from 2021, meaning the maximum you can put into an IRA is $6,000 if you’re under 50 or $7,000 if you are over 50, and that is the same for 2022 as it is for 2021.
Now, there are some income limitations that I just want to talk about too, when it comes to making pretax IRA contributions. So before I do pretax, let’s just do Roth for 2021, it was $208,000.
That was the modified adjusted gross income number, whereas if you had more than $208 were not able to do a Roth, that number is now $214. So, it went up a little bit. That means that if you make more than $214,000, you could not do a Roth IRA contribution; that’s if you’re married filed jointly. However, you can always or still at least I should say do a Backdoor Roth IRA, which allows you to do an after-tax IRA contribution and then convert it to Roth. That still is available.
The Build Back Better bill is currently in a state of coma, so it’s dormant, but it could be resurrected and there is a provision in the Build Back Better bill that seeks to eliminate the backdoor Roth IRA.
It was supposed to go into effect January 1, 2022. That’s probably not going to be the case depending on when the Build Back Better bill happenes. So more likely than not, you’ll be able to still do Backdoor Roth IRAs in 2022. But remember, the $208 number went to $214. Now, if you want to do traditional IRAs, there are some rules to keep in mind. If you have access to a 401(k) plan at work and you’re married filed jointly.
The old number is if you’re covered by a plan at work. If you made more than $125, you were not able to do a pretax IRA. That new number is $129. Now, if you’re married filed jointly and your spouse is covered by a plan and you’re not. The old number was $207, the new number is $214.
If you make more than $214 this year and your wife’s covered or your spouse, I should say, its covered by a plan at work, you can’t do a pretax IRA. However, you can still do a Backdoor Roth IRA as I mentioned. If you’re single or head of household, the old number was $76,00 in 2021. New number is $78,000, meaning if you make more than $78 and you’re single and you’re covered by plan at work, you can’t do a traditional pretax IRA, and if you’re married filed separate, it’s $10,000.
Okay, so those numbers just keep in mind. They went up just to recap from $125 to $129 if you’re married and you have access to a plan at work, even if you don’t contribute. If you’re married, but your spouse has access, the number went from $207 to $214, that’s the income threshold. If you make more than that, you can’t do a pretax IRA. Single or head of household $76 to $78.
Marriage file separate still $10,000. And again the Roth went from $208 to $214. SEP IRAs. SEP IRA last year 2021 was $58,000 was the max. It is now up to $61,000.
So remember, SEP IRAs are pure profit sharing plan. 20% if you’re a single member LLC or a sole proprietor of your net Schedule C income, 25% of W-2 or guaranteed payments. The max you could put in is $61,000. That’s always pretax. You can convert it to Roth, but there’s also no catch-up. One thing to keep in mind. 401(k), which I’ll get to in a second, Solo has a catch up. The SEP does not.
SIMPLE IRAs. The old number in 2021 was $13,500. New numbers $14,000. Also, remember, there’s a $3,000 catch-up if you’re over 50. So, SIMPLE IRA is not super popular, but just wanted to mention that number. So let’s get to Solo 401(k), which has the most changes.
So, the maximum you can put into a Solo 401(k) in 2021 was $58 or $64,500. If you’re over 50. The new number instead of $58 is $61,000, if you’re under 50, and if you’re over 50, it went from $64.5, it’s now $67,500. So, it went up again $58 to $61 and $64.5 to $67.5.
Now how do you break down that maximum aggregate number of $61 or $67.5? It’s as follows: employee deferrals in 2021, it was $19,500 or $26,000 if you’re over 50. The 2022 number is $20,500, so up $1000 from the $19,500 and from $26 to $27,000.
So 2021, if you’re over 50, the max employee deferral was $26. That number is now $27,000. Again, that could be done in pretax or Roth, depending on your plan documents. And remember, employee deferrals obviously are dollar for dollar.
Right? So if you make $30,000, you can go up to $27, you don’t need, it’s, not a profit sharing percentage like an employer contribution. Okay, so now for employer contribution, it’s still the 20% if you’re a sole proprietor or a single member LLC; 25% if you’re a W-2 or partnership. And again, when you add up that profit sharing amount, it can’t go above the $61 or the $67,500. So, say you made $500,000 and you’re under 50.
You can do $20,500. We know 20% of $500,000 is $100. And a hundred plus $20,500 is $120,500, which is more than the aggregate amount of $61,000 maximum. So in that case, if you make $500 grand, you’re only going to be able to put away $61,000. What happens if you make $100 grand?
Well, you can do $20,500 plus the 20% of the $100, giving you about $40,500. When I say “about” I’m sorry, my Canadian accent comes in when I say that word, but you have to take into account net self employment FICA tax, which is about 15%. So just keep that in mind on the gross number. The amount you can contribute is net of the Social Security FICA amount. Now, if you’re over 50, you get that catch up.
Right? So let’s say you make $200,000 and you’re a W-2. You want to max out, you can do $27,000 plus 25% of $200. Okay, giving you another. Let’s do that, 200,000 times 25% gives you God, my math is not good this time $50,000.
So $50 plus the $27 obviously is too much. Right? So what happens? You’re limited if you’re over 50 to the $67,500 so you can’t do the full $50 and the $27, which is $77, you’re going to be stuck at the $67.5. You’re not going to be able to do the full $50.
Remember, you’re capped at the maximum of that $67.5 or the $61,000, and that’s broken down into employee deferrals, which is now $20,500 or $27,000. If you’re over 50. That could be in pretax or Roth plus the employer contribution, which is 20% if you’re a single member LLC, sole proprietor. 25%, if you’re W-2, that has to be in pretax, but you can always convert to Roth. Now what about the Mega Backdoor Roth 401(k)? Well, just like the Backdoor Roth IRA, there was a provision in the Build Back Better bill which sought to eliminate one’s ability to go after-tax, dollar for dollar, up to which is now $61 or $67,500.
That is still technically alive and an option because the Build Back Better bill is in a state of comatose or dormant still. So technically you can still do it for 2022. Although, again, if the Build Back Better bill gets passed in January or early February, there is a chance that it can retroactively apply to January 1, 2022. But our insiders are telling us that if the Build Back Better bill doesn’t get passed until March, April, May, then they’re just going to allow the Mega Backdoor Roth 401(k)s for the 2022 taxable year.
Kind of push out that provision to start in 2023.
Why do you want to do Mega Backdoor is obviously if you’re a Roth lover, it’s the easiest, cleanest, quickest way to max out your Roth to the $61 or the $67.5. Whereas, if you just did the employer and profit sharing, all you’d be able to do in Roth is the $20,500 or the $27,000 if over 50, and then you’d have to convert the employer contributions to Roth and pay tax on the converted amount. Whereas the Mega Backdoor Roth 401(k) will let you literally go dollar for dollar $61 or $67.5, based off your net Schedule C or your W-2.
So huge opportunity. We’ll see what happens.
I’m still praying that that provision, someone gets kicked out of the bill. Not sure if that’s going to happen. It just doesn’t seem that Manchin or really anyone has this on their radar, and I think the Biden team is just focused on getting Manchin on board. Once they get them on board, they’re going to pass some form of the Build Back Better bill and just concerned and pretty much relegated to believe that the elimination of the Backdoor Roth, IRA and the mega Backdoor Roth 401(k) probably is going to happen.
Well, I’m not hopeful, I want it to be removed, but I’m not sure how confident I am.
So, those are the numbers to keep in mind, if you have access to a plan at work, then you’re generally not able to do profit sharing, you’re going to be limited to the $25 or the $27,000. Hopefully you’re getting a Safe Harbor matching contribution, which is another great incentive to just save through a retirement plan, because with the Safe Harbor match, whether it’s three, four, 5%, depending on your employer, you’re literally getting free money from your employer. So, I encourage you to put in that minimum at least at three, four, 5%, so that match kicks in.
Yeah, some plans will do an automatic non-elective match, but most plans do not.
Most plans will require you to put in that minimum of three, four, 5% of your salary. So if you make $50K and it’s a 3% match, some plans will require to put the $1,500 in, so they match you the $1500. So if you don’t put that 3% in, you’re potentially going to lose that match, which is literally free money. So, definitely want to save through a 401(k). IRA, traditional and Roth have stayed the same. Other than the income numbers, which I went through.
SEP went to $58 to $61. SIMPLE went from $13.5 to $14 with a $3,000 catch up if over 50. And the biggest change is the Solo, which went from the $58 to $61 if you’re under 50. $64.5 to $67.5, If you’re over 50. Employee deferral from $19.5 to $20,500. Employer, obviously stayed the same, and if you’re over 50 went from $26 to $27. When I say the employer went the same, it’s the same. It’s the 20% or 25%. Same rules apply, but you’re capped at the $61 or the $67.5 when you add the employer contribution with the employee deferral contribution as well. One other thing to keep in mind, if you make contributions to an employer plan at work, you have to keep that in mind when you are determining how much you can put into your Solo plan. So for example, I work at Apple and I put in $15,000 in the Apple 401(k) and I have a side business, I sell shoes on Ebay, eeZees and Nikes. I’m under 50; I’m not going to be able to put in more than the $5,500, right? $20,500 minus the $15K I put in at the Apple plan. Employee deferrals are based off the individual.
So even if you have access to 15 plans at 15 different jobs, you’re capped at the $25 of the $27,000 if you’re over 50. Employer contributions are capped based off the business. So if you get an employer contribution in Apple, you can also max that 25 or 20% out at your side job, allowing you to go above the $61 or the $67.5. But that’s obviously rare. Most people don’t have that opportunity because if you work as an employer, most don’t do profit sharing, they just do the match.
So just keep that in mind. Also, keep in mind the Control group rules. If you own 80% of two or more businesses, it’s treated as one business. If there’s brother-sister common ownership and there’s attributions through family members, you may be limited on making contributions to a separate business, because the IRS may treat it as part of one business, under the control group rules. Same with businesses where even if you own less than 80%, there’s some common ownership and affiliated services, beware, also some common ownership, even if it’s 1% and there’s management services being provided, beware.
So the control group rules are super broad and they can catch you in a very uncomfortable position where you have to literally make up for those contributions. Liquidate the contributions and pay excise tax.
So be super careful. And that’s another reason you want to work with experts when setting up a plan to make sure that these control group rules can get discussed, and the best way of structuring your plan will be reviewed, whether it’s through Safe Harbor, whether it’s through plan testing, and if you’re a Solo best was to maximize your contribution. So there you go. I know it’s a handful of information.
You’re probably just getting through New Year’s, and you’re just like, oh, man, I can’t believe you hit me with all this info. Don’t worry, we got tons of info on our website, on our blogs. I’m going to do a live YouTube on this so you can ask questions or just watch me kind of repeat what I’m saying in today’s podcast,. But it’s important to know, you got to know the maximum contribution, especially if you’re self employed. You got to know how the solo 401(k) works.
Yes, we are here to help, but I think you’re just a lot more effective as a retirement investor if you understand the rules that are governing your plan for that year. Same goes with the SEP IRA, Traditional and Roth, not much to discuss since nothing’s changed. Which again, just for the record, I’m surprised, considering we’re at over 6% inflation. I’m kind of shocked that the IRA and Roth IRA contributions didn’t go up at least $500.
I think it’s really negligent on the part of the government, basically holding down our retirement contributions in the face of pretty widespread inflation. That’s not helping anyone. Yeah, they’re obviously worried about more tax deductions, but if prices are going up, we need to save more for our retirement because things are only going to get more expensive in the future. So, I think it’s short-sighted negligent. I don’t want to say, maybe not negligent, but irresponsible tactic on the part of the government to keep the traditional IRA and Roth contributions the same as 2021 in the face of widespread inflation.
That’s the most popular way people save. There’s 60 plus million IRAs out there. So capping people’s retirement savings; it’s unfortunate. So there you go.
Happy, healthy New Year. Thanks for spending the first week of 2022 with me. Don’t forget to subscribe if you haven’t and you can like it as well. Why not? And don’t forget to check out our YouTube channel where you’ll find all our content.
Five videos, one live and three podcasts. It’s just great place to go. Great depository of information, if you just want one place to get all the information you need on all relevant self-directed retirement topics. Whether it’s IRAs, 401(k)s even ROBS. Talking about trends, new investments, tax court cases, whatever comes up, I will promise to offer you a short, succinct, and hopefully clear summary of what’s going on. So spend some time with me. I think you’ll learn a lot and you’ll have some fun, so let’s do it. Happy New Year and I appreciate you guys listening. Have a great rest of your week.
And Talk to everyone again next week. Take care.