Planning for retirement is always an evolving process. In addition to the changing macroeconomic environment, annual updates from the IRS can affect how you plan and save for retirement. The start of 2022 was no different, as the IRS made numerous updates to retirement regulations. Societal changes over the past few years, mainly due to the coronavirus pandemic, have also shifted how Americans plan for retirement. Here are some of the new rules about retirement in 2022 that you should incorporate into your retirement planning.
Increased Contribution Limits for Certain Retirement Plans
For tax year 2022, the contribution limit for 401(k), 457, 403(b) and the government’s Thrift Savings Plan all increase by $1,000 to $20,500. Note that the contribution limit for traditional and Roth IRAs remains the same, at $6,000.
Increased Income Phaseout Levels for Traditional and Roth IRAs
While there are no income limits for traditional IRA contributions, the IRS does limit the amount you can earn and still receive a tax deduction on your contribution. For traditional IRAs, the increased income phaseout levels for tax year 2022 are as follows:
- $68,000 to $78,000 for single taxpayers covered by a workplace retirement plan
- $109,000 to $129,000 for married couples filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan
- $204,000 to $214,000 for a taxpayer not covered by a workplace retirement plan married to someone who’s covered
- $0 to $10,000 for married couples filing a separate return and covered by a workplace retirement plan
For Roth IRAs, your eligibility to contribute to one is based on your income. Here are the income phaseout limits for Roth IRAs:
- $129,000 to $144,000 for single taxpayers and heads of household
- $204,000 to $214,000 for joint filers
- $0 to $10,000 for married couples filing separately
Social Security Payouts Increased Due to Inflation
For current retirees, Social Security payouts were substantially increased due to the record jump in inflation. In recent years, the annual Social Security Cost-of-Living Adjustment, or COLA, has been low or nonexistent, but for 2022, payouts jumped by a whopping 5.9%.
Change to Life Expectancy Tables
In order to determine the amount of your required minimum distribution, the IRS publishes life expectancy tables. As people continue to live longer, the IRS updated its life expectancy tables for 2022. Essentially, the change increases life expectancy across the board, meaning the size of your required minimum distribution will now be lower.
Reminder About RMD Requirements
Historically, account holders had to begin taking annual withdrawals starting at age 70 ½, but as of 2020, that beginning distribution age was extended to 72. This isn’t a new development for 2022, but rather a reminder since the old age requirement had been in place for so long.
On the Horizon: Will Build Back Better Finally Pass?
The Biden administration’s “Build Back Better” bill didn’t make it through Congress, but many of the provisions in the bill are still circulating around Washington. Specifically, many are still in favor of closing a loophole known as the Backdoor Roth IRA, in which those ineligible for Roth contributions convert other after-tax retirement plans into a Roth. Keep your eyes open to see if this provision regains momentum in another bill.
Societal Changes
Not all aspects of retirement hinge on the IRS and Congressional legislation. In recent years, mostly in response to the coronavirus pandemic, the American view of retirement has subtly changed. Here are some of the planning trends that are currently changing the face of retirement.
Rise of the FIRE Movement
The so-called “FIRE” Movement, or “Financial Independence, Retire Early,” has continued to gain momentum in the 2020s. Proponents of this movement believe in constructing a life wherein they can save 50% or more of their income in an effort to retire in their 30s or 40s. While not for everyone, if you’re interested in this type of lifestyle, you should start as early as possible.
Rise of Part-Time Work in Retirement
With the rise of remote work and mobile access to employment, more and more traditional retirees are continuing to work part time from home. This can be a way to not only stay mentally sharp but also to reduce your reliance on a giant retirement nest egg.
How Much Do You Actually Need To Retire?
The amount you actually need to retire varies from person to person and is a constant topic of discussion. However, with the recent spike in inflation — which reached 7.9% on a year-over-year basis as of February 2022 — retirees may need more than they imagine. Consult with your tax and financial advisors about whether or not you need to make any shifts in your investment and/or spending strategies to ensure that rising costs don’t swallow up your retirement budget.