A 401(k) retirement savings plan offers financial advantages to both employers and employees. Employees can build retirement funds with tax benefits, while employers can enjoy tax credits, lower employee churn, and more engaged workforces.
However, 2022 brings with it a few changes to the 401(k) plan. These may be important to bear in mind – whether you’re already contributing to a 401(k), or deciding on a retirement saving option that meets your needs.
To help you ensure you’re up to date with the contribution and withdrawal rules, New York Life has compiled a guide to the adjustments, for you to consider.
401(k) plans are known as “defined contribution” plans. This means the IRS sets a limit on how much an employee can contribute to their plan annually. This limit is regularly reviewed and raised to keep it in line with the rate of inflation. If your employer is matching your contribution, in part or in whole, there is also an overall limit on the combined employee-employer contribution.
In 2022, the contribution limit for employees in a 401(k) plan has changed from $19,500 to $20,500; an increase of $1,000. The combined total, including employer contributions, is set at a maximum contribution limit of $61,000.1
For savers aged 50 years or older, the limit is even higher, as it includes a “catch-up” contribution of $6,500. This brings the annual contribution limit to $27,000 for employees, and $67,500 when including employer contributions.2
During 2020, as a result of the impact of the COVID-19 pandemic, there were some temporary adjustments to the 401(k) withdrawal rules. The Coronavirus Aid, Relief and Economic Security (CARES) Act aimed to help Americans cope with the financial realities of the pandemic.
Among its provisions, the CARES Act made it easier to withdraw funds from your 401(k) plan, removing tax penalties on some early withdrawals, and relaxed rules on loans from certain types of accounts.
However, the 10 percent early distribution penalty on withdrawals has resumed. Anybody younger than 59½ years old who wishes to withdraw funds from their traditional 401(k) plan will need to pay the penalty, as well as the usual income tax.3
In 2020, an option was introduced that allowed tax payments on withdrawals to be spread over three years; it is important to highlight that this option no longer exists, and only applies to withdrawals made in 2020.
Required minimum distributions
When you reach a certain age, the IRS requires all 401(k) plan owners to begin regularly withdrawing from their plans. The specified amount is based upon certain criteria, including your life expectancy. Currently, the threshold age to start making mandatory withdrawals is 72; before 2020, the age was 70½ years.4
Required minimum distributions were paused during the pandemic, but they have also now resumed; so, it's important to ensure you’re making the correct withdrawals from your plan.
Simple 401(k) plans are often offered by small and mid-sized businesses. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, introduced in 2019, was designed to make it easier for small businesses to offer their employees 401(k) plans by providing tax credits and protections.
In 2022, the contribution limit is $14,000; the catch-up amount is set at $3,000.5
New York Life is committed to supporting every customer successfully navigate their financial futures. Saving for retirement is fundamental to ensuring you, and your family, can comfortably enjoy your later years together.
401(k) plans offer a great way to build retirement funds while benefiting from tax advantages. Life insurance policies also offer future financial protection, and, depending on which policy you purchase, also come with specific tax advantages.
1“401(k) Contribution Limits for 2021 vs. 2022”, Adam Hayes, https://www.investopedia.com/retirement/401k-contribution-limits/, Jan 2022.
2“Here’s what’s new with 401(k) plans this year”, Sarah O’Brien, https://www.cnbc.com/2022/02/05/heres-whats-new-with-401k-plans-this-year.html, Feb 2022.
3 “What every retirement saver needs to know about 2022”, John Waggoner, https://www.aarp.org/retirement/planning-for-retirement/info-2022/what-every-retirement-saver-needs-to-know.html, Jan 2022.
4 What every retirement saver needs to know about 2022”, John Waggoner, https://www.aarp.org/retirement/planning-for-retirement/info-2022/what-every-retirement-saver-needs-to-know.html, Jan 2022.
5 “Here’s what’s new with 401(k) plans this year”, Sarah O’Brien, https://www.cnbc.com/2022/02/05/heres-whats-new-with-401k-plans-this-year.html, Feb 2022.