Adjust your 401k/457/403b Contributions in Time for the New Year
The limit for employee contributions to 401k/403b/457 accounts has increased! In 2019 and 2020, the max an employee could contribute to the aforementioned tax-advantaged accounts was $19,500. For 2022, this amount will increase to $20,500! This amount does not include employer matching, so your employer can still contribute to your account if you reach the $20,500 limit.
If you haven’t done so already, it’s time to recalculate your pre-tax retirement deductions. The IRS sets annual limits for how much a person can contribute to their 401k (if you work for a for-profit company), 403b (if you work at a non-profit), or your 457 (if you are a government employee such as a police officer, fire fighter, or public school employee). As a public school employee I have access to both the 403b and 457, so I get to double up on my deductions. Before investing any money from your paycheck, I’d recommend maxing out your pre-tax contributions first since your money will go 22-24% further, if you earn between $40,500 and $165,000 gross.
In most cases, you can choose a vendor for your retirement account. I highly recommend Vanguard, an investment firm that specializes in low-cost investment vehicles such as index funds and ETFs. Most investment firms have high management fees that eat into the majority of the interest earned from your accounts over time.
For reference, here are the updated contribution limits:
403(b)/457(b) Contribution Limits for 2022
• Elective Deferral Limit: $20,500.00
• Age 50 Catch-up: An additional $6,500.00, for a total of $27,000.00* (Applies to Employees Age 50 or over by 12/31/2022)
• 403(b) Special 15 Years of Service Catch-up: Up to an additional $3,000
This week, I updated my salary reduction for my 403b and 457 to reflect these new limits. By increasing my elections from $19,500 for both accounts to $20,500, I’ve reduced my taxable income by $2,000 in 2022. If you plan to max out your retirement contributions annually, remember to research the contribution limits each winter; don’t forget to look at IRA limits as well!
If you read this post and feel confused about retirement accounts, I suggest watching Youtube videos that explain the basics of these accounts. This is exactly how I learned about them, just keep watching videos, listening to podcasts (my favorites are Brown Ambition and Choose FI), and reading blogs like mine 🙂 If you have questions, drop them below.