I hope January finds you and your practice healthy and off to a great year. In addition to resetting annual goals it’s also time to reset your retirement plan deferrals. 2022 has brought increased limits to most types of retirement plans and if you haven’t adjusted your contribution rate yet, here’s your guide to doing so for the two most common plan types: Simple IRAs and 401ks.
This year, the deferral rate for Simple IRAs went from $13,500 to $14,000. The catch up contribution for participants over the age of 50 remains at $3,000 for a maximum contribution of $17,000.
Calculation under age 50: $14,000 Annual Salary Deferral %
Calculation over age 50: $17,000 Annual Salary = Deferral %
The maximum participant contribution has increased from $19,500 to $20,500, but the catch up contribution remains at $6,500 for those 50 and older. Keep in mind that catch up contributions are available for anyone who turns 50 during the 2022 calendar year, so if your birthday is 12/30/2022, go ahead and increase your contribution amounts for the year now.
Calculation under age 50: $20,500 Annual Salary Deferral %
Calculation over age 50: $27,000 Annual Salary = Deferral %
Another decision most 401k participants have to make is whether to contribute pre-tax dollars or after tax (Roth) dollars into their 401k. Conventional wisdom is to contribute pre-tax dollars during working years when you are in a higher tax bracket so that future withdrawals will come out in a lower tax bracket. But other factors should be considered as well, such as:
- Potentially higher tax rates in the future
- Earned income in retirement (practice real estate income for example) pushing retirees into a higher tax bracket
- Increased Medicare premiums due to a higher AGI
- The certainty of knowing you have dollars that will never be subject to tax
When I manage 401k plans, I try to meet with each participant to determine if a pre-tax or after-tax contribution best works for their situation. Many times we split contributions so that some are pre-tax to pull income out of a top tax bracket and the remainder as a Roth contribution. It’s a big of a guessing game though- unfortunately making this distinction is an imperfect science since contributions have to be made during the year before knowing what annual income will look like.
As a side note, 401ks are my preferred retirement vehicle for clients because of higher contribution levels, the ability to contribute Roth dollars and administration is much easier for practice owners than Simple IRAs (when working with the right company). With backdoor Roth IRAs on the Build Back Better chopping block, Roth 401ks may be the only remaining way for most high income earners to build tax-free dollars.
Whatever your practice retirement plan, take a minute this month to make sure you’re maximizing your contributions and that your deferral rates are correct. And if you don't have a plan, I strongly encourage looking into it for a tax-advantaged way to build retirement assets. If you have any questions, don’t hesitate to reach out!
Have a great week,
P.S.- Hayes Wealth Advisors works exclusively with Optometric Practice owners to help them build wealth outside their practices through customized, industry-specific planning. We have built planning tools to comprehensively answer the questions that face practice owners in today's environment. Our services are available both on a one-off basis or in the context of a full financial plan. Set up a call if you'd like to learn more about how Hayes Wealth Advisors can help you make the best financial decisions for your practice and family.