In this segment of “Financial Planning Q&A” on Motley Fool Live, recorded on Dec. 1, retirement expert Robert Brokamp discusses new contribution limits and tax brackets for 2022.
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Robert Brokamp: It is the time of the year when Uncle Sam updates all kinds of important numbers for next year; contribution limits, tax brackets, stuff like that. I was going to highlight a few things that are going to be changing in 2022.
First of all, the contribution limit for 401(k) is going up, $1,000. It's going to be $20,500 if you're younger than 50, with another $6,500 if you're 50 or older. IRAs are not going up. It's going to stay $6,000 with another $1,000 for the 50 and better crowd.
However, other numbers related to IRAs are changing as they do just about every year. I'm going to cover those. You can see them on the screen right now, starting with the traditional IRA. Now, if you're not covered by a plan at work and your spouse is not covered by a plan at work, anyone who contributes to a traditional IRA, it'll be deductible, even if you make a million dollars.
However, if you or your spouse are covered by a plan at work, it changes things. Your ability to deduct contributions to a traditional IRA phases out depending on your modified adjusted gross income. Those are the numbers you see here on the screen. Those are the numbers if you are the person who is covered by a plan at work and covered by a plan basically means you have access to one.
If you have a 401(k) at work and you don't participate, you're still considered covered. Now, what if you don't have a plan at work but your spouse does? Here are the limits that were the deductibility of a traditional IRA contribution begin to phase out.
Now, what people are usually more interested in are the income limits on Roth IRAs, and those income limits are going up a little bit next year. You can see the 2021 and 2022 limits there on your page, and of course, you have until April 15 to make a 2021 contribution to a Roth.
If you make too much money to contribute to the Roth IRA, you can do something called the backdoor Roth, by which you contribute to a non-deductible traditional IRA and convert soon thereafter. We have talked on this show before how Congress is likely to eliminate that next year. Not definite, but it is certainly in the latest version of the House bill of the build-back-better plan. This could very well be the last year you are able to do a backdoor Roth.
Now, here's the thing you need to know though. While you have till April 15 to contribute to an IRA, you do not have April 15 to convert. If you want to do a backdoor Roth, you have to do it before Dec. 31 of this year.
Then just the other thing I'll highlight very quickly is just tax brackets. On the show, we often will mention things like contributing to a Roth or traditional and say, well, if you're going to be in a higher tax bracket in retirement, you should do the Roth, if we're going to be in a lower tax bracket in retirement, you choose the traditional and then some people often wonder, well, what's my tax bracket?
Well, here you have the 2021 and 2022 tax brackets if you're single. This is your taxable income, which you start with your gross income, subtract your deductions and adjustments. That gives your taxable income. You apply that to your tax brackets and then here's married. Just think about again your taxable income, just to give you an idea of where you are in terms of tax brackets this year and then next year.
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