The IRS announced last week an update on the contribution limits to 401(k) and other workplace plans effective in 2022. The maximum employee contribution is now up to $20,500 up from $19,500 for the past few years. The catch-up contribution for individuals age 50 or over remains at $6,500 totaling $27,000 of employee money that can now go into workplace plans regardless of income.
Those are the figures for employee money only. Any company match and/or profit sharing can send you above these limits. The IRS does have limitations on the total allowed between employee and employer, but rest assured your employer will keep you within the guidelines allowed. Another thing to keep in mind is contributions with employer plans must typically be made via your paycheck deductions. If you wait until the end of the year it can be difficult to catch up and get to the desired contribution levels.
IRA and Roth IRA contribution limits of $6,000 (and $7,000 for individuals 50 and above) remain the same however the income limitations were adjusted up modestly.
I typically recommend maxing out workplace plans before looking to any IRA or Roth strategies since there are no income limitations or restrictions on workplace contributions.
As for investment options within plans the range of choices can be quite wide. Most plans nowadays have a default age-based strategy. These age-based strategies accomplish a few things.
• They put you into a risk bucket based on your age which isn’t perfect for everyone but typically better than choosing extremely risky or ultra conservative funds on your own.
• The second thing they do is automatically dial down the risk of the fund over time automatically. This would automatically change the investments within the same fund over time. If a 45-year-old investor, Jess gets defaulted into an “Age-based 2045 mutual fund” it may have roughly 80% stocks and 20% bonds at that time. If Jess maxed out her plan each year adding to that fund but never looked at it or traded again until retirement at age 65, it would then have something to the effect of 50% equities and 50% in bonds. All of that rebalancing and readjusting of risk is done without any action needed from Jess.
These funds are not for everyone but for the many folks it simplifies investing and helps keep investors out of their own way while allowing them to focus their time on other things going on in their lives. The most important factor to consider is the stock to bond ratio and assure that aligns with the amount of downside that accompanies the fund during down markets.