What the Increase in the 401(k) Contribution Limits Could Mean for You
The IRS recently announced an increase to the 401(k) contribution limits for 2022. The 2022 contribution limit will be $20,500, up from $19,500 for 2021. For those who are age 50 or over at any point in 2022, they will be able to add an additional $6,500 in catch-up contributions bringing their total limit to $27,000. This new limit is effective for all contributions made on or after January 1, 2022. Impact on Other Retirement Plans Beside 401(k) plans, the new $20,500 contribution applies to: 403(b) plans Most 457 plans The government’s Thrift Savings Plan SIMPLE IRA plans will see an increase of $500 in the contribution limit to $14,000. The catch-up contribution limit remains at $3,000 for those who are 50 or over. The increased contribution limit on 401(k) plans also extends to Solo 401(k)s, a plan that is commonly used by those who are self-employed. One popular retirement plan that did not see a contribution increase for 2022 was IRAs. This includes both traditional IRAs and Roth IRAs. The 2022 contribution limits remain at $6,000 with a $1,000 catch-up contribution limit for those who are 50 or over. One type of IRA that will see a contribution increase is the SEP-IRA, a type of retirement account generally used by those who are self-employed. The maximum contribution is based on 25% of your compensation for the year which is unchanged for 2022. However, the maximum contribution for 2022 will increase to $61,000, up from $58,000 in 2021. How This Can Benefit Those Who Are Employed Ron Lefton, Managing Director, Investments for Wedbush Securities in Newport Beach, California says, “This is a great thing for all employees who have access to a 401(k) plan. Allowing for additional pre-tax savings will help more people prepare for retirement along with potentially decreasing their annual amount of tax owed.” He adds, “Over time, tax deferred compounding is one of strongest ways to create wealth. I encourage my clients to maximize their 401k contributions as early as possible in their career as the tax deferred growth over time combined with any amount of employer match can lead to a large retirement nest egg years down the road.” A 401(k) or similar employer-sponsored defined contribution retirement offers an easy and painless way to save for retirement for employees. Contributions are made directly from your paycheck and the money is generally not missed. Many employers offer a matching contribution which is essentially “free money” that can help employees accumulate even more for retirement. Good News for IRAs Even though the contribution limits themselves will not change for IRAs in 2022, there will be an increase on the income limits for pre-tax contributions to traditional IRAs and for Roth IRA contributions in 2022. For traditional IRAs, the income phaseout range where those who are covered by a 401(k) plan or similar retirement plan will increase in 2022. The modified adjusted gross income (MAGI) limits are: Note there are additional phaseout ranges for situations where the spouse making the contribution is not covered by a workplace retirement plan, but their spouse is, and for taxpayers who file as head of household. There are no contribution restrictions for those who are not covered by a workplace retirement plan. For those whose income is at or above the upper limit, they cannot make pre-tax contributions to a traditional IRA. There are no income limits for after-tax contributions to a traditional IRA. Regarding Roth IRAs, Jeff and Scott Olsson of Olsson Investment Group in Grand Rapids, Michigan says, “We discuss the advantages of Roth IRA accounts on a regular basis, with clients and prospects. We lay out a simple framework for investing. We suggest to our clients that they have 3 buckets of money-taxable, tax-deferred, and tax-free. The Roth IRA account being the most common account type in the tax-free bucket. With the possible future increase in personal income tax brackets, the Roth IRA account is even more attractive.” For Roth IRAs, the income phaseout range will increase in 2022. The modified adjusted gross income (MAGI) limits are: For those whose income is at or above the upper limit, they cannot contribute to a Roth IRA. For those who want to contribute more to a Roth account or whose income is too high for a Roth IRA contribution, a Roth 401(k) contribution might be a good option if their employer’s plan offers this option. The contribution limits are the same as for traditional 401(k) accounts and there are no MAGI restrictions. Year-end is a good time to assess where you are in terms of saving for retirement and to make sure you are maximizing tax-advantaged options such as a 401(k) or an IRA. Contact your Wedbush financial advisor to discuss the new contribution limits and all retirement planning options. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
What You Need to Know: Changes Coming in 2022 to Tax Brackets and Deductions
The IRS has indicated that the tax bracket ranges and the standard deduction limits will be higher for the 2022 tax year due to the rate of increase in inflation. The rate of increase in consumer prices have caused all tax bracket thresholds and related parameters in the tax code to rise at a faster than normal rate. Standard Deduction and Other Changes for 2022 The standard deduction for those filing married and jointly increases to $25,900 for 2022, up from $25,100 in 2021. For single taxpayers the 2022 standard deduction is $12,950, up from $12,550 in 2021. Increases in the standard deduction serve to raise the threshold for taxpayers to be able to itemize deductions. The personal exemption will increase to $12.06 million per person from $11.7 million in 2021. While there was talk at one point about reducing the personal exemption, it will increase for 2022. This can have implications for your estate planning strategies. The annual gift exclusion will increase to $16,000 from $15,000 for 2022. This is the amount each person can gift to anyone of their choosing without having to complete an estate and gift tax return. The alternative minimum tax exemption amounts for 2022 have changed as well. Taxpayers who trigger the AMT typically lose certain deductions and other tax breaks. Tax Bracket Changes for 2022 The marginal income tax rates for 2022 are: This compares to the marginal tax rates for 2021: The brackets for long-term capital gains tax rates have also increased for 2022. Here are the brackets for 2022 showing income levels tied to long-term capital gains rates: The brackets for long-term capital gains rates have been bumped about 3.1%, that same increase as with the regular income tax brackets. Note that taxpayers who reach a certain income threshold will be subject to an additional 3.8% in long-term capital gains taxes called net investment income tax or NIIT. The income threshold for NIIT varies based on your filing status. According to Ron Lefton, Managing Director, Investments for Wedbush Securities in Newport Beach, California, “Rising tax rates, along with an increased standard deduction, is an expected consequence stemming from a large amount of government stimulus being pumped into our economy. The IRS has the authority to make annual changes to income, deduction and credit provisions due to inflationary pressures. We have seen inflation growing this year so I expected these increases.” He adds, “Knowing these changes in advance may help advisors coordinate the 2022 plan of attack with clients and their tax preparers. Although tax ramifications are an important aspect of the investment advisory process, building the best investment plan for our clients is always our main priority.” How to Prepare If You’re Expecting Major Changes The end of the year is a good time to not only do year-end tax planning for the current year, but to look at your tax situation for 2022. Will things be changing? Do you plan to leave your job and become self-employed? Are you getting married or expecting a child? Do you anticipate that your income will change up or down in 2022? These and other factors can impact your tax and investment planning for 2022. This is a good time to consult your Wedbush financial advisor and your tax advisor to be sure you’re planning for 2022 is on track. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Inflation and Supply Chain Disruption – How This Will Impact the Holidays
Inflation and supply chain disruptions are all over the news lately. Perhaps the best indicator of inflation is reflected in the 5.9% COLA increase in Social Security benefits for 2022. This is the largest increase in decades. Supply chain disruptions are impacting almost every industry from automobiles to the availability of many popular items on grocery store shelves. This is impacting both the availability of many products as well as the price. Added to these woes is a labor shortage in many industries. What goods are becoming more costly? One item that has seen a marked increase in price is gasoline. This makes the cost of traveling by car to visit friends and family this holiday season more costly. The price of meat has increased with the Labor department noting a 10.5% increase in the price of meat, poultry and eggs over the past year. These increases will have an impact on the cost of this year’s holiday meals. Other goods with substantial increases include: Tvs 12.7% Appliances 7.1% Restaurants 4.7% The Labor Department lists the increase in gas prices at a whopping 42.1%, with prices for rental cars up 42.9%! Hotel prices were up 18%. All of this really adds to the cost of traveling to see loved ones or heading out for a family vacation this holiday season. Opinions vary regarding how long this inflation will last. Supply chain issues, labor shortages across many industries and the actions of the Fed will all play a role here. Labor shortages are impacting the travel and hospitality sectors, ranging from airlines to hotels and restaurants among others. This is having an impact on prices and availability. The labor shortages here should not really be a surprise as many workers were laid off or furloughed during the height of the pandemic. Many of these workers have undoubtedly moved to jobs in other industries. Travelers should look for higher prices and potential travel delays this holiday season. Supply Chain Disruptions There have been countless stories in the news warning consumers to shop early to ensure they are able to buy the items they want this holiday season. Supply chain disruptions are having an impact on the availability and the prices of a wide range of goods this year. According to consulting firm McKinsey and Company, demand will be strong this holiday season, but consumer loyalty will be tested. Their research has found many consumers are willing to switch retailers, including online versus shopping in store. Consumer brand loyalty is also being tested. Tom Nikic, SVP, Equity Research | Footwear & Apparel for Wedbush Securities says, “Since most apparel and footwear that gets sold in the U.S. is imported from Asia, there have been significant delays in the supply chain heading into the holidays. This has primarily been a function of shipping container shortages and congestion at the West Coast ports. The good news is that most apparel/footwear brands have been proactive about mitigating the impact, using strategies such as earlier deliveries, increased use of air freight and diverting goods to other ports. So, while there may be some product shortages this holiday season, it shouldn’t be terrible.” He adds, “The other issue is that the supply chain issues are also driving cost inflation for the industry, as transportation costs have risen significantly. When combined with inflation in employee wages and other cost inputs (e.g. cotton), the industry is facing meaningful cost inflation. To combat this, most brands have announced their intention to raise prices, either through fewer discounts and/or like-for-like price increases. Thus, consumers may need to brace for paying more for clothing and footwear than they’re used to.” All in all, both this holiday season’s shopping and travel should be interesting. Well-to-do consumers will likely continue to spend, but many middle-income consumers may cut back. As far as the impact on companies, those that deal with labor shortages and supply chain issues the best should see the benefits on their bottom line. Contact your Wedbush advisor to discuss how these issues might impact your investing strategy. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.