Retirement Contribution Limits For 2022!

Why the Government is Like a Spouse with a Massive Spending Problem

In October 2021, the federal government extended the debt ceiling by $480 billion, effectively raising its spending limit to $28.9 trillion. When this debt ceiling extension went through, it was expected to allow the government to continue functioning for a laughably short seven weeks.

But you know what really happened? Washington blew through that money in just eight days. First of all, that’s just plain reckless. Second of all, to be that far off on their calculations is unbelievable. If you made calculations that poorly in a math class, you would get an F. A third-grader could do a better job of managing the government’s budget than the folks in Washington are doing right now!

Here’s an interesting thing—the Federal Reserve, which controls inflation and interest rates, among other things, is set up to be separate from Capitol Hill. Well, perhaps the relationship between the two has become a little too close lately. After all, the current low-interest-rate environment creates a false sense of just how much Washington can feasibly borrow.

Here are the numbers to help you qualify this:

The average interest rate that the government paid on its debt in September 2021 was 1.605 percent, as compared to 2.492 percent in September 2019. Less than one percentage point may not seem like a big difference, but it effectively allows the US to borrow about 55 percent more money without changing the amount of outlay. As you might imagine, this works out quite well if you’re trying to throw a bunch of money into the economy during a pandemic.

The Problem with Low Interest Rates

So, what’s the problem with low interest rates for investors? And more importantly, what’s the solution?

The first problem is that if you have money in a savings account, you don’t earn hardly any interest on that money. Secondly, if you’re not satisfied with the rate of return on the money sitting in a savings account, you might be tempted to chase new and shiny investments. For instance, cryptocurrency and non-fungible tokens might appear lucrative at the moment, but any investor worth his salt will tell you this is silly stuff not worth investing in. Thirdly, low interest rates lead to inflation.

So what’s an investor to do in this kind of environment? It all goes back to your investment allocation. There are currently about 1,000 companies worldwide that pay a dividend yield of more than 3 percent. This is a pretty significant group of companies from which you can create a well-diversified portfolio, whether through mutual funds or individual, high dividend-paying stocks.

New Retirement Contribution Limits for 2022

Every year, the IRS announces the new contribution limits for IRA, Roth IRA, 401(k), 403(b), and other retirement plans. The bad news is the limit for IRA and Roth IRA did not change for 2022. It’s still at $6,000, which hasn’t changed since 2019. But the good news is the limit did increase for all other types of plans.

The new limit for 401(k), 403(b), and 457 plans in 2022 is $20,500, an increase of $1,000 over the limit for 2020 and 2021. This means if you like to maximize your contributions each year, you should plan to put a little bit more into your account than you did last year. Also, the new limit for SIMPLE plans is $14,000, up from $13,500 in 2021.

Be aware that contribution limits vary by age. If you’re over age 50, catch-up contributions allow you to put more money into your retirement account if you’re behind. Here are the limits you need to know:

  • If you have an IRA or Roth IRA, you can contribute up to $1,000 extra per year, or $7,000 total.
  • If you have a 401(k), 403(b), or 457 plan, the catch-up contribution is $6,500, or $27,000 total for the year.
  • If you have a SIMPLE plan, you can put $3,000 extra into your account per year, or $17,000 total.

The catch-up contributions for all retirement plans are the same as last year.

Of course, the actual amount you’re allowed to contribute to an IRA or Roth IRA depends on your income. If you choose to open an IRA, the first question is: Are you eligible to participate in an employer-sponsored plan, such as a 401(k), 403(b), or 457? If so, you are subject to the IRS’s income limits. Roth IRAs are based purely on your income, with varying limits depending on your filing status and spouse’s eligibility for an employer-sponsored plan, if applicable. If you have questions about this, we recommend speaking to a financial planner.

How Do We Produce Better College Graduates?

Over a million students graduate from college each year. Unfortunately, a large proportion of grads are saddled with tons of debt. And sadly, many have a complete lack of understanding of basic finances. If you have a college student in the family, here are some tips you can give to help them prepare for real life after graduation:

  • Get financially educated: There are tons of great resources to help young grads and couples who are just starting out. Books, apps, websites, YouTube channels, and radio shows like Dave Ramsey can help them gain a financial footing.
  • Introduce the 50/30/20 rule: This rule allocates 50 percent of a person’s income to necessities, 30 percent to discretionary spending, and 20 percent to saving or paying off debt.
  • Get a basic understanding of real-world expenses: Direct your college grad to add up all of their expenses so they can clearly see how much they’re spending on little extras like coffee and eating out.
  • Be careful with credit cards: Paying off every card every month is a great way to build credit and avoid becoming swamped by high-interest debt.

For more financial tips and help managing your retirement plan, please contact Nelson Financial Planning in Winter Park, FL, at 407-629-6477.