The Internal Revenue Service (IRS) has announced the 401(k) and IRA Limits for 2022. If you are working with business owners, this may present a new opportunity for you to tap into the qualified plan market.
In late 2021 the Internal Revenue Service (IRS) stated that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500. The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and older is not subject to an annual cost-of-living adjustment and remains $1,000, the IRS said.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,500. Thus, the IRS said, “participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022.”
Qualified Pension Plans & Retirement Funds
As you may know, the IRS designates certain retirement and pensions plans as “qualified” and “non-qualified.” In the past, qualified pensions and retirement funds have been the more popular vehicle for savings over non-qualified plans in America. Popular qualified plans may include:
- 401(k)s
- 403(b)s
- SEP Plans
- Defined Benefit Plans
A retirement or pension plan is considered “qualified” if it meets the federal standards promulgated by the Employee Retirement Income Security (ERISA). Below is a brief overview of the plans I mentioned:
401(k)s
A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. It is named after a section of the U.S. Internal Revenue Code. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
403(b)s
The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
The plan, which is closely related to the better-known 401(k) plan, allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for the employer to match part of the employee's contribution.
SEP Plans
A simplified employee pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish. The employer is allowed a tax deduction for contributions made to a SEP IRA and makes contributions to each eligible employee’s plan on a discretionary basis.
Additionally, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted on Dec. 20, 2019, small employers get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with auto-enrollment. That’s on top of the start-up credit they already receive.
SEP IRAs often have higher annual contribution limits than standard IRAs. In a sense, they're a cross between a traditional IRA and a 401(k)—in the sense that, like the latter, they can receive employer contributions. And those employer contributions are vested immediately.
Defined Benefit Plans
A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company is responsible for managing the plan's investments and risk and will usually hire an outside investment manager to do this. Typically, an employee cannot just withdraw funds as with a 401(k) plan. Rather they become eligible to take their benefit as a lifetime annuity or in some cases as a lump-sum at an age defined by the plan's rules.
Turn-Key Solutions Available
Throughout 2022 the qualified plan market could serve as “low hanging fruit” for your firm. Nowadays carriers have positioned their products in such a way that there is a very low barrier to entry.
Many carriers offer turn-key solutions for these types of plans that include set-up and administration. In many cases, the carriers do not even require that you be securities licensed to offer their products. Contact us to go over some solutions that may be available to you:
