Know the 2022 IRS contribution limits
The Internal Revenue Service (IRS) sets limits on the amount you can contribute to your workplace plan each year. For 2022, the maximum is $20,500. The catch-up contribution limit is $6,500. If you're 50 or older, you can add $6,500 for a total of $27,000.
How IRS rules affect your contributions
It is reassuring to be eligible to receive employee benefits, but you need to be aware that there are limits, from maximum annual benefit earned under a defined benefit plan to Social Security taxable wage base. You can see the full list by downloading 2022 Employee Benefit Limits.
Consider saving 10%
One rule of thumb is to contribute at least 10% of your income to your plan each year. Some experts suggest saving even more. You can start by putting 6% of your pay into your plan and increasing it by 2% to 3% each year until you reach 10% or more. If possible, always contribute enough to get the full company match.
When you make pretax contributions to your plan, you lower your taxable income and reduce your tax bill. But your take-home pay isn’t reduced by as much as you're saving. For example, say you’re in the 25% tax bracket and make a $200 contribution to your plan each paycheck. You’d only reduce your take-home pay by $150.
Save more at 50 and over
You'll want to enjoy this phase of life in style — and also make sure you have enough saved to live well in retirement. Catch-up contributions let you deposit more money into your workplace retirement plan after age 50. You're eligible on January 1 of the year you turn 50, no matter how late in the year your birthday falls.
That extra contribution can make a big difference. For example, Scott is 50 and earns $72,000 per year. He had already reached the annual contribution limit for his workplace plan. But now that he’s 50, he can defer $250 more from each paycheck. At a modest 6% rate of return, Scott will add $160,371 to his account's bottom line by the time he’s 65—a significant boost.1
1This is a hypothetical example. It is not indicative of any product or performance and does not reflect any expense associated with investing. Taxes will be due upon distribution of the tax-deferred amount and if shown, results would be lower. Actual investment results will fluctuate with market conditions so that the amount withdrawn may be worth more or less than the original amount invested.