Take advantage of potential tax benefits for the 2021 tax year!
- Are you eligible to make a 2021 contribution to your Traditional or Roth Individual Retirement Account (IRA)?
- Have you met the 2021 contribution limit for ALL your retirement plans?
- Contributions may be tax-deductible.
- Your earnings will grow tax deferred or tax free.
- Retirement accounts offer protection from creditors.
April 18th, 2022 is the deadline for eligible taxpayers to make 2021 Roth IRA or Traditional IRA contributions.
2022 Contribution limits are higher!
From a financial planning standpoint, the beginning of the year is an opportunity to review your savings strategies and make sure you are maximizing your retirement plan contributions:
- Have you updated your retirement plan contributions to take advantage of increased savings limits for 2022?
- If you are turning 50 this year, have you updated your retirement plans to account for the increased savings limit?
- Should you consider converting funds in your traditional IRA to Roth IRA?
- Are you making the most of work benefits like the Health Savings Account, Flexible Savings Account and Dependent Care Flex Savings Account contribution limits?
Contributing to the following types of retirement accounts will grow your investment portfolio while also maximizing tax avoidance strategies.
Traditional IRA/Roth IRAs
As a reminder, the 2021 contribution limit is $6,000 per person. For individuals over age 50, there is an additional catch-up contribution of $1,000. 2022 IRA contribution limits are the same. Consult your financial advisor or tax planner to determine if you are eligible for a tax-deduction or tax-free contribution.
401(k) Plan Contribution Limits Going Up!
The employee contribution limit for 401(k) plans has increased to $20,500 in 2022, up from $19,500 in 2020 and 2021. If you are 50 and older you will be able to contribute an additional $6,500 as a “catch-up provision”.
Individual 401(k) Contributions
An individual 401(k) is designed for a business owner with no W2 employees. Owners can make contributions as both EMPLOYEE and as EMPLOYER. Total combined Employee/Employer limits:
Tax Year Annual Contribution Limit Age 50 or older Catch-Up
2021 $58,000 $6,500
2022 $61,000 $6,500
SEP IRA Contributions
A simplified employee pension (SEP) is an individual retirement account (IRA) that can be set up by a small business or self-employed individual for retirement savings. The contribution limits for SEP IRAs allow a higher limit compared to traditional IRAs. However, there are matching requirements for employees that should be taken into consideration before setting up a SEP IRA.
The following are contributions an employer can make to an employee's SEP IRA which cannot exceed the lesser of:
- 25% of the employees’ compensation, or
- $61,000 limit for 2022 ($58,000 for 2021)
Health Savings Accounts (HSA) are a fantastic way to reduce taxable income, grow your investment portfolio and pay for medical expenses with tax-free money. To contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). Below is a chart that shows the 2022 deductible contribution limit.
Unlike the Flexible Spending Account, funds in your HSA will not expire at the end of the year and can be invested. After age 65, HSA accounts are treated by the IRS as an IRA, with the added benefit of always being eligible to pay for qualified medical expenses tax-free.
If you have children or grandchildren who hold an HSA and are actively participating in an HDHP this is a great opportunity for them to take advantage of this account to save for future medical needs or allow them to build their medical funds for retirement which will all be tax free.
Flexible Spending Account (FSA) & Dependent Care Flexible Spending Accounts (DCFSA)
A flexible spending account (FSA) is an employer-sponsored benefit that helps you save money on qualified healthcare expenses. In 2022 you can contribute $2,850 pretax dollars to fund the account which is up from $2,750 in 2021. Be sure to spend your FSA funds before they expire at the end of the calendar year!
If you are taking advantage of the FSA benefit, confirm that your employer opted into the new legislation Congress passed that allows you to use the carryover limits that are in effect for the 2021 to 2022 tax year.
For example, suppose in 2021 you did not spend $1,500 in your FSA. You can roll this amount over into your account for 2022. You can then contribute up to $2,850. If you contribute the maximum amount to your FSA in 2022, you will have a total balance of $4,350 to spend in 2022.
A Dependent Care Flexible Spending Account is like an FSA, but funds are used to pay for daycare, after-school programs, elder care, and other qualified dependent expenses.
One drawback to a traditional FSA is using up eligible funds before the year-end deadline. Because dependent care expenses are more consistent, funding and using a DCFSA can be easier to plan. Don’t miss this lesser-known benefit!
Roth IRA Strategies
Roth IRA Conversion
Converting a portion of or all your Traditional IRA to a Roth IRA can reduce income taxes in later years by reducing or eliminating Required Minimum Distributions (RMDs) that begin when an account holder reaches age 72. Be aware that converted IRA amounts are taxed as ordinary income in the year of conversion. A careful analysis should be conducted before implementing this strategy!
Backdoor Roth IRA Conversion
A Backdoor Roth IRA is a strategy for high-income taxpayers to deposit funds into Roth IRAs. The taxpayer makes non-deductible IRA contributions and then converts those funds to a Roth IRA. However, this strategy does not work well if the taxpayer has other IRA accounts.
Mega - Backdoor Roth IRA Conversion
A mega backdoor Roth is a 401(k) rollover strategy transferring after-tax 401(k) contributions to a traditional 401(k) and then converting those funds to a Roth IRA. This little-known strategy only works under very particular circumstances.
All these savings strategies have advantages and requirements and some or all may be a good fit for you. They may also apply to your children, friends, or other family members.
Please pass this on to anyone who may benefit and encourage them to schedule a complimentary consultation with our advisory team if they would like to discuss it further!