New Year, New Opportunities: Tax-Advantaged Retirement Saving & Taxation Limits

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Headlines have been all about volatility, inflation and the Federal Reserve’s pace of interest rate increases as we enter a new monetary policy regime. But for investors, there is another side to financial planning besides the markets and your long-term asset allocation.

Ensuring you are taking advantage of annual changes and avoiding any pitfalls in your savings and tax planning is a big consideration. We have pulled together a short read on the biggest changes to retirement savings, tax-advantaged gifting limits, Medicare, tax brackets and the impact of the Build Back Better Act (or failure thereof) on the “Backdoor” Roth IRA strategy.

Spoiler Alert: In a plot twist everyone saw coming, inflation turns out to be the hero for tax-advantaged 401(k) savings.

Traditional and Roth 401(k) Contribution Maximums

Inflation at 7% is definitely not a good thing at the grocery store, but when it comes to tax-advantaged retirement savings it is giving a little back. The IRS bases contribution limits for many retirement savings plans on CPI. The spike means that the limits got a big jump up. This gives you an opportunity to lower your taxable income and put more money away for retirement.

Beginning in 2022, the Traditional and Roth 401(k) maximum is $20,500, up from $19,500. The catch-up provision for savers 50 and above remains the same, $6,500, for a total of $27,000.

Given the strong year in the markets last year and the potential for volatility ahead, you probably want to have a look at the allocation of your 401(k) and reset, as necessary. Boosting your retirement savings to ensure you hit the new maximum will not have much of an impact on your paycheck – but your retired self will thank you.

Traditional and Roth IRA Changes

Contribution limits to IRAs are not pegged to inflation, so they did not increase. However, the phase-out income ranges are tied to inflation, so they went up slightly. These income ranges determine whether and how much of your IRA contribution is tax-deductible.

For 2022, the phase-out ranges are as follows:

For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

The Gift Tax Exemption

The annual federal exclusion for gifts was bumped up $1,000 to $16,000 for 2022. For a married couple, this means they can gift $32,000 to any individual without using their lifetime exemption. The lifetime exemption also went up, to $12.06 million per person.

The Medicare Surcharge: IRMAA

Medicare premiums increased due to inflation, but the ranges for income that trigger a surcharge also increased slightly. Keep in mind, there is a two-year look back on income in determining the surcharge.

Part B Premium Part D Surcharge Single Married Couple
$170.10 <$91,000 <$182,000
$238.10 $12.40 $91,000-$114-000 $182,001-$228,000
$340.20 $32.10 $114,001-$142,000 $228,001-$284,000
$442.30 $51.70 $142,001-$170,000 $284,001-$340,000
$544.30 $71.30 $170,001-$500,000 $340,001-$750,000
$578.30 $77.90 Above $500,000 Above $750,000

Federal Taxes

Anticipated increased were averted by the failure of the Build Back Better Act to pass. The standard deduction received an $800 increase for married couples. The top tax rate remained the same at 37% for incomes greater than $539,900 for single filers and $647,850 for married couples. The other marginal tax rates and incomes changed as follows:

Tax Rate Single Married Filing Jointly
35% >$215,950 >$431,900
32% >$170,050 >$340,100
24% >$89,075 >$178,150
22% >$41,775 >$83,550
12% >$10,275 >$20,550

Health Savings Accounts (HSA)

Contributions for Single plan Health Savings Accounts is $3,650, and for Family plans $7,300 for 2022; and if you are over or turn age 55 by December 31, 2022, you have the ability to make a “catch-up” contribution of $1,000 – this applies to both Single and Family plans. Be careful when implementing an HSA plan mid-year or moving to to/from a Single or Family plan as there are specific contribution rules you must follow.

“Backdoor” Roth IRAs

One of the provisions in the Build Back Better Act was to eliminate the loophole that allows a traditional IRA to be opened and then immediately converted to a Roth, eliminating taxes on growth, and allowing for tax-free withdrawals with no RMDs in retirement. With the failure of the Build Back Better Act to pass, the strategy remains viable.

However, the Act remains in play and Columbus Street is taking somewhat of a wait and see approach, with each passing day it seems less likely the legislation will be revived. And while the legislation may still pass, this provision may not be included and further, mid-term elections may remove the risk of retroactive legislation negating the tax treatment of the strategy.

As always, please be in touch with any questions or schedule a meeting today!