Contributions to Existing Pension Plans Made in Reverse

Contributions to Existing Pension Plans Made in Reverse

Contribution limits for catch-up plans such as the 401(k), Roth IRA, and 403(b), as well as an older man and a lady using a digital tablet in a cafe.

The Internal Revenue Service (IRS) presents individuals who have been saving for retirement with an opportunity to make what is known as a catch-up contribution. You can take advantage of these contributions to add more money to your tax-favored retirement plan regardless of whether you have saved consistently throughout the course of your work or whether you got a late start saving for retirement.

Most retirement accounts that get better tax treatment from the IRS have limits on how much you can put into them each year. In addition, catch-up contributions are subject to a cap as well.

Key Takeaways

You need to be at least 50 years old before the end of the year in order to be eligible for catch-up payments.

You are eligible to make catch-up contributions to your retirement account if you have a conventional IRA, Roth IRA, SIMPLE IRA, SARSEP, 401(k), SIMPLE 401(k), 403(b), or 457 (b) plan.

When it comes to certain types of retirement accounts, the amount of the catch-up contribution will be determined by a person’s income level. People with high incomes might not be able to contribute anything at all in this case.

Contribution Limits for Older Individual Retirement Accounts (Traditional and Roth)

If you have a typical individual retirement account (IRA), the maximum contribution you can make to it in 2022 is $6,000. (This is unchanged from 2021). If you have an annual income of $129,000 or less in 2022, you are eligible to contribute the entire $6,000 to a Roth IRA (or $204,000 if you are married and filing jointly). This is an increase from the previous amounts of $125,000 and $198,000 in 2021. 

The maximum of $6,000 applies to all of your individual retirement accounts (IRAs), regardless of whether they are standard or Roth IRAs. If you are 50 years old or older, you are eligible to make catch-up contributions of an additional $1,000, for a total of up to $7,000. 

You are only allowed to contribute an amount that is equal to or less than the amount of taxable compensation you received if your total pay was less than $7,000.

If you earn more than $129, 000 in 2022 (or 204, 000 if you are married and filing jointly), the amount of money that you can contribute to your Roth IRA, including your catch-up contribution, may be affected by your modified adjusted gross income (MAGI) as well as your filing status for your federal income tax return. This is the case even if you are eligible for the catch-up contribution.

Roth IRA contributions for catch-up purposes

If you are at least 50 years old, have the following tax filing status, and have the following MAGI, you are eligible to contribute:

Married filing jointly or an eligible widow(er) with an annual income of less than $204,000 may be eligible for a tax credit of up to $6,000 (or $7,000 if over 50).

If you are married and file your taxes jointly or if you are a qualifying widow (er) and your income is more than $204,000 but less than $214,000, you qualify for a reduced amount.

$214,000 or more if married, filing jointly, or a qualifying widow(er).

If you are married and are paying your taxes separately and you lived with your spouse for less than $10,000 during the year, you may qualify for a reduced amount.

If you are married but filing separately and at some point, throughout the year you lived with your spouse, you will receive a tax credit of up to $10,000.

If you are single, head of household, or married but filing separately and your annual income is less than $129,000 and you did not reside with your spouse at any point during the year, you may be eligible for a tax credit of up to $6,000 (or $7,000 if you are over 50).

Whether you are single, the head of your home, or married but filing separately, if you did not live with your spouse at any point during the tax year, you may be eligible for a lower tax rate.

A reduced amount for payments of at least $129,000 but less than $144,000

Whether you are single, the head of your household, or married but filing separately, if you made $144,000 or more and you did not live with your spouse at any point throughout the year, you do not have to pay a marriage penalty.

To calculate the decreased amount that you are eligible to contribute if your income falls within one of the ranges that are affected.

If you are married and filing your taxes as a married couple or if you are an eligible widow, you can deduct $204,000 from your MAGI (er).

If you are married but filing a separate return and you lived with your spouse at any time throughout the year, you do not have to deduct anything from your MAGI.

If you file your taxes using a method other than the standard one, take $129,000 off of your MAGI.

If you are single, head of household, filing a separate return, or married but filing a separate return and did not live with your spouse at any time during the tax year, then divide the amount that you got by $15,000.

If you are married and filing a joint return, a qualifying widow (er), or married and filing a separate return and you lived with your spouse at some time during the tax year, then divide the resulting amount by $10,000. This applies to you even if you are filing a separate return.

Multiply that figure by the maximum allowable contribution limit, which is $6,000 for 2022 and $7,000 if you are eligible for catch-up payments.

Take that number and subtract it from the maximum amount that can be contributed. This is the maximum amount that you are allowed to contribute, which includes any catch-up contributions. 

For the year 2022, the maximum amount that you may contribute to your Roth IRA if you are over the age of 50, married, and filing a joint tax return, and your modified adjusted gross income was $206,000, would be as follows:

($206,000-204,000)/$10,000 = 0.2

0.2 x $7,000 = $1,400

$7,000-$1,400 = $5,600

Contributions Called “Catch-Up” That Can Be Made To Simple IRAs, SEP IRAs, And SARSEPs

IRA-SIMPLE, for short.

If you have a SIMPLE IRA, the maximum contribution you can make in 2022 is $14,000. This is an increase over the previous limit of $13,500 in 2021. If you enroll in another retirement plan that is offered by your employer in 2022, the total amount that you are permitted to contribute to both plans will increase to $20,500. This is an increase from the previous limit of $19,500 in 2021. 

Your contribution maximum for a SIMPLE IRA gets boosted by $3,000 if you are at least 50 years old and your company enables catch-up contributions.

A SIMPLE IRA, also known as a Savings Incentive Match Plan for Employees IRA, is a type of individual retirement account to which both an employer and each of its employees can contribute

It is frequently utilized by enterprises of a smaller size instead of a 401(k) retirement plan. When a person has a Simple Individual Retirement Account (SIMPLE IRA), their employer will usually contribute up to 3% of their total pay.

SEP IRA

Catch-up contributions are not allowed in SEP IRAs because they only accept payments from employers.

The Simplified Employee Pension Plan (SEP Plan) gives employers the opportunity to make contributions to typical individual retirement accounts (IRAs) that have been established for their staff members. A SEP IRA can be established by a person who is self-employed in addition to any other type of business.

The lesser of 25 percent of an employee’s income or $61,000 is the maximum amount that an employer can contribute to an employee’s SEP IRA in 2022. This limit is an increase from the previous limit of $58,000 in 2021.

SARSEP

A simplified employee pension plan (SEP) that was established prior to 1997 is called a SARSEP, which stands for a salary reduction simplified employee pension plan. The lesser of $20,500 ($19,500 in 2021) or 25 percent of the employee’s pay must be contributed to a SARSEP plan in the year 2022. 

However, employees who are at least 50 years old and participating in a SARSEP plan are allowed to make catch-up contributions. Catch-up contributions of up to $6,500.7 are permitted within SARSEP plans in 2022 and 2021, respectively.

Amounts That Can Be Contributed as a Catch-Up to 401(k) Plans

If you have a 401(k) plan, the maximum amount of money you can contribute from your paycheck to the plan in 2022 is $20,500, which is an increase from the previous limit of $19,500 in 2021. If you are over 50 in 2022 or 2021 and your employer enables catch-up contributions, the cap for your retirement savings will increase by $6,500. 

Employees of companies with 100 or fewer workers are eligible to participate in a SIMPLE 401(k) plan, which stands for Savings Incentive Match Plans for Employees.

In 2022, the maximum contribution to a SIMPLE 401(k) plan increases to $14,000, up from the previous maximum of $13,500. If you are qualified to make catch-up contributions, the maximum amount you can contribute will increase by $3,000. 

Contributions for People Who Are Behind on Their 403(b) or 457(b) Plans

The maximum annual contributions that can be made to a 403 (b) or 457 (b) plan in 2022 are the same as those for 401 (k)s: $20,500 for regular contributions (increased from the previous limit of $19,500 in 2021), plus an additional $6,500 for catch-up contributions if you are eligible.

403(b)

You are eligible to contribute an additional catch-up amount to your 403(b) plan if the following conditions are met: You are enrolled in the plan; you have been with your company for at least 15 years, and the plan offered by your employer allows for such contributions. The amount is determined by whichever of the following is the lower:

$3,000

$15,000 less the total number of catch-up payments made as a result of this regulation in previous years.

Multiply the total number of years working for this company by $5,000, then subtract the entire amount of catch-up contributions you’ve made in previous years.

A 403(b) retirement plan is available to workers who are employed by: 

Groups that are exempt from paying taxes

The public education system (s)

Organizations providing cooperative hospital services

Indian tribal administrations are responsible for organizing their respective public school systems.

A few of the ministers

The lesser of $61,000 (which was $58,000 in 2021) or your entire income, including benefits, for your most recent year of employment, is the maximum amount that can be donated to a 403(b) by both you and your employer in 2022.

457(b)

In the three years leading up to your retirement, your 457 (b) plan can let you make an additional catch-up payment. The catch-up payment for 2022 will be the lower of the following two amounts:

The limit on the amount that can be deferred voluntarily is $20,500.

If you are not paying catch-up payments because you are over 50, the basic annual limit plus the amount of the basic annual limit that you did not utilize in previous years

State and local government employees are eligible to participate in a 457 (b) retirement plan.

The lesser of $20,500 (compared to the amount that might be contributed to a 457 (b) by both you and your employer in 2022) or your total compensation, including benefits, is the maximum amount that can be donated to a 457 (b).

Alterations Made to the Upper Limits of Contributions to Retirement Plans

The maximum amount that can be contributed normally rises either annually or every other year as time goes on. In most cases, the inflation adjustment will be made in increments of $500. Catch-up contributions are made more slowly and are usually set for a period of five years at a time.

If you have any questions concerning your retirement savings, you should consult with either your company or an accountant or tax attorney in order to get answers to your issues.

Leave a Reply