Client Question: Maxing out Retirement Plans

December 1, 2022

Holiday season – the perfect time to bake cookies, put up decorations, enjoy time with family and friends – and of course check on the funding status of your retirement plans! I recently worked on this with a client and thought it would be helpful to share.

There are a variety of retirement plans that American workers can use to save in tax advantaged way. The three types I’ll speak to in this article include 401k (or 403b if you work for a non profit organization), IRA, and Roth IRA.

The funding rules, limits, and timelines vary for each so we’ll take them one at a time.

401k: Brief Background and Limits

A 401k is an employer sponsored retirement plan (it gets its catchy name from the tax code setting it up!). In a 401k plan, employees contribute via payroll deduction and employers may also provide a match (either per pay period or in a lump sum). For 2022, the employee contribution limit is $20,500, with an additional $6,500 allowed if you are over age 50.

Contributions follow a calendar year, so that maximum applies from January 1, 2022 to December 31, 2022. Only money put into the plan during the calendar year will be applied against that year’s limit.

401kWhat should I do before year end?

If you have extra cash to save, you can check the funding status of your 401k for 2022. You can determine your current year-to-date contributions on your most recent paystub, or on your 401k plan website. Be sure to look at only employee contributions.

If the total of your employee contributions year to date (plus what you are scheduled to put in during December at your present deferral rate) is below your applicable limit, you could consider increasing your contribution for this final month of 2022. Of course, this will lower your paychecks for December so be sure you have other cash available to cover the difference.

This is a great way to take full advantage of this year’s available funding amount – since once the calendar turns to 2023, a new limit kicks in.

(Side bar: This was the exact situation I worked thru with a client this week. She had extra cash she was looking to deploy into investments. By determining that she had “room” in her 401k yet for 2022, we were able to increase her contribution rate for the rest of December, thereby allowing her to save in the most tax efficient way for her situation).

IRAs: Brief Background and Limits

IRAs, or individual retirement accounts, are held by individuals outside of their employer (at a custodian such as Fidelity, Vanguard, Schwab, etc). Traditional IRAs are pre-tax funds and Roth IRAs are post-tax funds.

For 2022, the contribution limits to IRAs are $6,000, with an added $1,000 if you are over age 50. However, there are income restrictions on tax deductibility (traditional IRA) and contribution amounts (Roth IRA). See IRS guidelines for more details.

IRAs What should I do before year-end?

Contributions for IRAs can be made up until the tax filing date (April 18, 2023 for tax year 2022) – so you don’t need to rush and do anything in December. However, if you are confident that you will be below the relevant income thresholds and have cash you want to invest sooner vs. later, you could considering doing so now. But again – ensure you will qualify based on your income level.

As always, we advise that you work directly with your financial advisor and tax advisor to find the right solution for you.

Happy Holidays – and Happy Savings!

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