Retirement planning is always a challenge. Amassing a big enough pile of retirement savings is tough in the best of times.
What about now, amid the most uncertain of times? You can boost your odds of enjoying better growth from your savings during 2022 by understanding new rules for retirement planning in 2022.
Retirement Planning: Take Care Of Basics
Sure, take care of the basics too. Do the things you ought to do year in, year out. “You should do certain things to make sure you’re on track for solid retirement savings,” said Kirsten Hunter Peterson, director of the Workplace Thought Leadership team at Fidelity Investments.
Peterson added, “The easiest thing to do is make sure you’re not leaving money on the table.” That means make every effort to contribute enough to your 401(k) or similar plan to collect your employer’s maximum contribution. Otherwise, you’re turning down free money.
Another basic step in your retirement planning is to save enough. Fidelity recommends 15% of your pay. That includes any company match or other company contribution. If you set aside 10% of your pay and your employer kicks in another 5%, you’ll hit the 15% target.
What if you’re below that pace? Increase your contribution rate, even if you do it in small annual increments. Even small increases add up.
Boost 401(k) Contributions By A Little
Suppose you’re 45 years old. Your IRA held $63,000 as of mid 2021. That was the average for all 45-year-olds with IRAs at Fidelity. Suppose your IRA grows an average of 7% a year.
Let’s say you earn $60,000. You get 1% pay raises a year, and sock away 6% of your pay annually. You get a 3% company match.
What happens? By age 72, your target date for retirement, your nest egg would be $849,551.
Look what happens if you boost your retirement contributions by 1 percentage point a year until you and your employer are ponying up a combined 15% a year. Then stick with that rate until retirement.
By 72, your nest egg is brimming with $1.019 million, according to the Bankrate.com 401(k) calculator. That 1 percentage point a year increase for five years reaps a gain of about $169,400, or 20%. Not a bad trade. And your contribution increases are, in this example, about one-tenth the size of your annual pay raises.
Retirement Savings Success
But beyond those basics, savvy retirement planning requires you to understand new rules for 2022.
First up, you must keep track of which retirement savings federal tax collectors have their eyes on.
Take the Build Back Better (BBB) spending package proposed by President Joe Biden. Whether you favor or oppose its provisions, the BBB proposes to help pay for itself with several taxes, direct or indirect, on retirement accounts, if the Senate passes the BBB as it now stands.
One tax would start next year. It would bar the use of so-called backdoor Roth IRA conversions. Currently, those conversions let you get around the prohibition on contributions to a Roth IRA if your income is over $140,000. Now, you put the money into a nondeductible traditional IRA. Those have no income limits. Then you’d transfer it to a Roth IRA.
Not under the new rules. You’d no longer be allowed to shelter the money for the rest of your life. Children or grandchildren would no longer be able to inherit it and hold it for up to 10 years. For more details, read this other IBD report.
Retirement Planning: Understand New Taxes
Two additional taxes on retirement savings would take effect, if the Senate also passes them, in 2029. That gives you time to accelerate income into years prior to that. That could keep you below the annual income thresholds — $400,000 for single filers and $450,000 for married joint filers, in both cases in pre-deduction modified adjusted gross income — that would make the new rules apply to you.
Another way to cope with new taxes on retirement savings? “Holding investments in a variety of accounts that get different tax treatment,” said T. Rowe Price certified financial planner Roger Young, a senior retirement insights manager.
One tax would work this way: If your combined balances in all of your IRAs and 401(k)s total $10 million or more, then you’d be barred from making additional contributions.
That income, kept outside a retirement savings account, would likely be taxable.
The second such tax is more direct. In the year after your balance hits that threshold, you’d have to pull out 50% of your money. It would be taxable unless it’s in a Roth account.
You’d have to clear out 100% of the balance if your combined retirement account balances topped $20 million.
And don’t think those are potential hassles only for the super rich. “Many middle-class workers become retirement savings millionaires,” said Ed Slott, founder of IRAHelp.com. “Suppose a husband and wife both work for decent pay. They started saving early in their careers. Many end up with $5 million in retirement savings by age 60. They can double that before long.”
Retirement Planning: Gird For Inflation
Soaring inflation is another obstacle you must keep an eye on. Your best defense? Proper retirement planning means making sure your retirement savings include funds that tend to thrive amid inflation. That includes diversified stock funds like an S&P 500 index fund. It also includes funds with TIPS bonds, short-duration bonds, commodities, REITs and cyclical stocks.
For more details, see this other report in this special section.
New Contribution Limits
In addition, you also must keep track of which retirement savings accounts have new contribution limits. After all, your goal whenever possible is to save the maximum allowed.
That puts the maximum allowed to work in tax-deferred retirement savings accounts. And it positions you to earn the maximum available contributions from your employer.
Here are the 2022 maximum contributions for the key savings accounts:
401(k)s: $20,500 vs. $19,500 in 2021.
401(k) catch up: $6,500, unchanged from 2021.
Traditional or Roth IRA: $6,000, unchanged.
Traditional or Roth IRA catch up: $1,000, unchanged.
Health Savings Accounts (HSAs): self-only coverage, $3,650 vs. $3,600 in 2021; family coverage, $7,300 vs. $7,200 in 2021.
2022 Vs. 2021 Maximum 401(k) Contribution Limits
|Year||Basic Contribution Limit||Catch-Up Contribution (50 Or Older)|
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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