With 2021 rapidly drawing to a close, the clock is ticking for you to align your tax benefits and retirement plans for the year to come. As expected, there are several new programs, planned increases, and cautionary tales that constitute the financial landscape for 2022.
One thing, however, you may NOT have expected: That inflation you likely have experienced at the gas pump, grocery store – and pretty much everywhere else – in 2021 actually has delivered a boost to contribution limits for tax-deferred programs.
If you have not checked in with your investment advisor, you may want to pay them a holiday call and make sure you’ve done the necessary maintenance on your holdings to maximize the benefits available to you — so you can reap rewards once you decide to pull down your shingle for the last time. Do it now – if you wait until after the new year, you’ll likely miss a pay cycle (or two) to take full advantage.
Here’s a rundown of the most important things to get done before year-end:
- Supplement Your Retirement: With the boost to contribution limits, it is time to up your contributions to 401(k) and 403(b) plans since limits are swelling by $1,000 (up to $20,500 per vehicle). And, if you happen to be employed by a university, you can potentially drop another $20,500 into a 457 account – for a total of $41,000 tax free toward retirement in 2021. (By the way, come retirement time, the 457 payout horizon for professors is far longer than the five years mandated for most in private industry). Note that those 50 and older are eligible to contribute an additional $6,500 to both a 401k/403b and a 457b.
- Double Up to the Finish Line: For those in academia especially, if you haven’t maximized your contributions to a 457 and anticipate retiring in the next three years, you may be allowed to double your contribution over that three-year span. That means in 2022, you could ultimately squirrel away $61,500 into your tax-free retirement nest egg. Note that those older than 50 cannot do the additional $6,500 plus the “super catch-up” outlined here.
- Max Out that IRA: Though the 2022 contribution limit for IRAs (including Roth IRAs) will remain at $6,000 per person (or $7,000 if you’re over 50) in 2022, it’s important to get the full benefit of this tax-advantaged account as well. And for employees in Simple IRAs or self-employed (SEP) IRAs, there are similar benefits to be had – including catch-up contributions for those over 50.
- Back-Door Your Roth IRA One Last Time: It appears likely that Congress will soon shut the door to this beneficial program. For the uninitiated, a backdoor Roth IRA is a way that high-income individuals can contribute an after-tax maximum to a traditional IRA, then quickly transfer it into a Roth – where the money will deliver tax-free earnings in the future. Though the IRA contribution limit mentioned above still prevails, it’s a great way for those who have phased out to still reap a tax advantage later (as Roth distributions are taken tax-free).
- Take Out Those Mandatory Distributions: If you’ve hit the magical, government-mandated age of 72, you once again are required to take distributions from your IRA (or face a whopping 50 percent penalty). Though the government hit pause on this mandate in 2020 (to help with the economic effects of COVID), there is no such waiver for 2021. If you are reading this with a quizzical expression now, call your advisor immediately and make plans to do what is necessary to mitigate that 50 percent levy. If you truly don’t need the distribution for sustenance, you can donate the amount to charity (and gain another tax advantage in the process).
- Take Advantage of Rising HSA Contributions: Contribution limits to Health Savings Accounts also increase for 2022. The maximum contribution for individuals increases from $3,600 to $3,650 and for family coverage from $7,200 to $7,300. If you have not yet specified your payroll deduction for your HSA, hurry!
- Get Your FSA to Work for You: Don’t forget to spend your Flexible Spending Accounts (FSAs) for 2021 and increase your FSA for 2022! Any amounts deducted from your paycheck for 2021 for your Flexible Spending Account may need to be used by year end. An FSA allows you to pay expenses pre-tax (income and payroll) but they are directly deducted from your paycheck and if you don’t use it, you lose it. In 2022, the amount you can contribute to an FSA is now $2,850, up $100 from last year. Dependent care, however, drops from $10,500 to $5,000 – back to the pre-COVID levels — in 2022. So, these should definitely be used by end of 2021.
- And Challenge those Medicare Hikes!: Medicare premiums are slated to swell by 15 percent in 2022. And, if your income in 2020 was abnormally high, this means you’ll feel the full brunt of this increase. However, if you retired, got divorced, or had another qualifying event associated with a decrease in income this year, you would likely have a basis to challenge your Medicare premiums – and get them lowered for 2022.
Though December is a time when we’re all focused on holiday cheer, don’t let the government Grinch bite off a piece of your future. Your financial advisor can help you make sure you approach 2022 with the optimal mix of benefits for your particular situation.