401(k) Contribution Limits for 2021 and 2022 | What is the max to save?


By The Human Interest Team

A 401(k) is a common type of retirement account in which you contribute savings that come out of your paycheck before you pay income tax. Most commonly, employers sponsor an employee’s 401(k). However, sole proprietors, independent professionals, and other small business owners with no employees except for a spouse may qualify for a self-employed 401(k)

Even if you’re new to investing, a 401(k) offered through your employer is a powerful, simple way to put money away for your retirement. And each year, participants in these plans can save up to the max 401(k) contribution established by the Internal Revenue Service (IRS). The IRS increased contribution limits in 2022 for 401(k) plans and more. Here’s what you need to know.

401(k) contribution limits for 2022

Below are the updated contribution limits for 401(k), 403(b), and profit-sharing plans:

  • Contribution limits: $20,500 in 2022 (up from $19,500 for 2021 and 2020)

401(k) catch-up contributions limits: 2021 and 2022

Employees who have a 401(k), 403(b), or 457 account and are 50 years or older can contribute additional funds annually to their plans. Known as catch-up contributions, these also have annual contribution limits, which generally receive an annual cost-of-living increase. 

  • Catch-up contribution limits: Remain at $6,500 in 2022 (the same they were in 2021 and 2020) for a total of $27,000.

These additional contributions are meant to help individuals nearing retirement age increase the total value of their retirement account before they need to start accessing it for regular income. By taking maximum salary deferral and catch up contributions into account, an individual could potentially contribute a total amount of $27,000 to a 401(k) and 403(b) plan in 2022. 

Employer contribution limits

Many employers match a percentage of their workers’ 401(k) contributions as a valuable employee benefit. In fact, the majority of employers provide some type of match (86% match of small businesses and 95% of large businesses, according to the Plan Sponsor Council of America), while the average employer match is 4.7% of an employee’s salary.

There are several employer match formulas, but most 401(k) match programs usually use a percentage of an employee’s own contributions or a percentage of the employee’s salary to calculate the total possible match. 72% of plans that offer a matching contribution provide a single-tier match formula, such as $0.50 on the dollar on the first 6% of pay. 

Does my employer’s 401(k) match count toward my maximum contribution?

To put it simply, the answer is “no.” An employer matching contribution does not count towards your maximum contribution of $20,500. However, the IRS does limit total contribution to a 401(k) from both the employer and the employee—which means total contributions can't exceed either: 

  • 100% of an employee's salary, or 

  • The limit for defined contributions ($61,000 in 2022).

The limit for defined contribution plans in 2022 under section 415(c)(1)(A) is $61,000 (up from $61,000 in 2021). Workers older than 50 years are still eligible for a $6,500 catch up contribution and can have a maximum of $64,500 in employer and employee contributions. This applies to both traditional and Roth 401(k)s.

Solo 401(k) limits

If you’re self-employed, you may fund your own plan through financial institutions that offer solo 401(k) accounts. Called a one-participant 401(k) by the IRS, these plans have the same rules and requirements as a traditional 401(k) plan, and cover a business owner with no employees (other than a spouse working for the business). 

The main difference in one-participant plans is that, as a business owner, you wear two hats— employee and employer—meaning contributions can be made in both capacities: 

  • Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual—see below) within annual contribution rates:

  • $20,500 in 2022, or $27,000 in 2022 if age 50 or over; plus

  • Employer nonelective contributions up to:

  • 25% of compensation as defined by the plan

How solo 401(k) contribution limits work

If you’re a self-employed individual, you must calculate the maximum amount of elective deferrals and nonelective contributions you can make. When figuring out your contribution, your compensation is your “earned income,” or, your net earnings from self-employment after deducting both:

  • Contributions for yourself

  • One-half of your self-employment tax

Keep in mind that self-employed individuals must often pay the employer costs associated with 401(k) plans, typically including a one-time start-up fee, as well as a monthly account maintenance fee. You must also pay fees on the specific stocks and bonds you purchase with your 401(k) investments (although some plans have these baked into their fee structures). 

For more information, refer to the IRS table and worksheets found in Publication 560, Retirement Plans for Small Business.

What are Roth 401(k) contribution limits?

Contribution limits for Roth 401(k) plans are the same as traditional 401(k) plans

  • Maximum salary deferral: $20,500 in 2022 (up from $19,500 for 2021 and 2020) 

  • Catch up contributions (if you’re 50 and older): $6,500 in 2022, 2021, and 2020 (up from $6,000 in 2019)

While contribution limits are the same for Roth and traditional 401(k) plans, a Roth 401(k) is treated as a separate account within a traditional plan and allows for the contribution of after-tax dollars. Employers can contribute to an employee’s Roth 401(k) with matching contributions up to a certain dollar amount or percentage but it will always be through pre-tax contributions. Employers can decide to make elective contributions that aren’t dependent on employee contributions. 

Traditional vs. Roth 401(k)

Most 401(k) plans sponsored by an employer are either a traditional or a Roth plan. These accounts differ in how the account owner pays taxes. In a traditional 401(k), you pay taxes when you retire. In a Roth account, taxes are due when you invest your money. In other words, the money for your retirement comes out of your paycheck after you pay income taxes on those funds, not before. However, you enjoy a deferred tax benefit because you can withdraw the money in retirement without paying income tax.

Think about when your tax burden will likely peak to determine whether a traditional or Roth 401(k) account is most appropriate for your needs. If you have not been working for very long, you will probably be in a higher tax bracket when you retire and should consider a Roth 401(k).

If you are near the apex of your career, a traditional 401(k) account may be a better choice because you will likely land in a lower tax bracket after you retire. You may also want to opt for a traditional 401(k) if you like the idea of getting your tax payments out of the way long before you retire. Want the best of both worlds? You can even divide your maximum 401(k) contributions between traditional and Roth accounts each year to optimize your tax advantages.

Other IRS retirement account changes for 2022

In addition to contribution increases to 457, 403(b), and 401(k) plans, the IRS has additional 2022 updates:

Why does the IRS impose contribution limits?

Contributions to 401(k) plans are made using pretax dollars, which provides significant tax benefits. This means you don’t have to pay federal income tax for contributions up to the $20,500 limit (or $27,000 if you’re 50 or older), which lowers your taxable income. And because earnings in a 401(k) account are on a tax-deferred basis, dividends and capital gains aren’t subject to tax until you withdraw your funds.

However, because of the substantial tax benefits offered by 401(k) retirement plans, the IRS works to ensure that plans do not unfairly benefit company owners (key employees) and highly compensated employees (those that make more than $135,000 annually) over non-highly compensated employees. That’s where contribution limits and cost-of-living adjustments come into play. To ensure a 401(k) plan is structured fairly and not favoring specific employees, all 401(k) plans must pass a set of annual compliance tests.

Benefits of contributing to your 401(k) plan

401(k) account contributions provide a double tax advantage for taxpayers. Individuals are able to direct pre-tax funds from their paycheck into their 401(k), reducing the amount of their income subject to income taxes the following year. In addition, any earnings from 401(k) account contributions are also tax-exempt. 

Individuals will need to pay income taxes on funds taken out of 401(k) accounts during retirement. However, many find their income is lower during retirement than it was while working, placing them in a lower tax bracket. 

How do the immediate tax savings work with my 401(k) account?

Let’s look at a quick example to illustrate the benefits of contributing to a 401(k) plan. Jenae earns $75,000 per year and doesn’t contribute to a retirement plan. She’s 27 years old, single, has no dependents, and will be taking the standard deduction of $12,550*.

Adjusted gross income$75,000
401(k) contributions$0
Standard deductions$12,950
Taxable income$62,050
Federal tax due (estimate)$9,441

Now, imagine that Jenae contributes the maximum $20,500 to her 401(k) account in 2022. Her adjusted gross income is reduced from $75,000 to $42,100 and her Federal tax liability decreases by $4,510. Here’s Jenae’s tax picture maxing out her 401(k) contributions:

Adjusted gross income$75,000
401(k) contributions$20,500
Standard deductions$12,950
Taxable income$41,550
Federal tax due (estimate)$4,931

So, the immediate tax benefit of contributing the maximum amount allowed by law to a 401(k) in 2022 is a juicy 47.32% in tax savings—or $4,510 for Jenae.

401(k) plans designed for small business employees

Getting started with investing may seem intimidating, but it doesn’t have to be. Your 401(k) is a tool to help you save for retirement—and this guide is designed to help you think about long-term investments.

Human Interest specializes in 401(k) plans for small and medium-sized businesses. We offer flexible, customized plans designed to give employees the biggest chance to build their retirement savings. If you want to set up or switch to a 401(k) plan that’s advantageous for employees and employers, let your company know about Human Interest.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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*According to the IRS, the standard deduction for single taxpayers and married individuals filing separately is $12,950 for taxable years starting in 2022. In calculating this example, this standard deduction is subtracted from the hypothetical annual gross pay of $75,000 for a total of $62,050 taxable income. Based on taxable income and filing status—and with zero 401(k) contributions—it’s estimated that our hypothetical employee will be taxed at a 12.6% effective tax rate for a total of $9,441. When 401(k) contributions are increased to $20,500, our hypothetical employee’s taxable income decreases to $41,550, their effective tax rate decreases to 6.57%, and total estimated federal tax due decreases to $4,931.