Since the 1950s, the majority age of the U.S population has been 65 years or older. The number of people in this age group is expected to further increase in the coming years. Additionally, due to increasing life expectancy figures in the country, an average retiree is expected to live for at least 20 years after retiring. The steeply rising inflation, diminishing Social Security benefits, and lack of other government aids, have also made it imperative for all retirement planners to create well-designed retirement plans to secure the golden years of their life. As a retirement planner, the most effective medium to save for retirement is to tap retirement savings accounts like a 401(k), an IRA (Individual Retirement Account), Roth IRA, and more. According to a 2021 study, nearly 71% of the survey respondents relied on plans, such as 401(k), IRAs, 403(b) accounts, to fund their retirement expenses. Even though retirement plans like a 401(k) and an IRA have their advantages, over the years, the popularity of these retirement vehicles has been shadowed by the superior benefits of a Roth IRA.
A Roth IRA is an effective medium to grow your retirement savings without being restricted by the drawbacks of a traditional IRA or a 401(k). Unlike a 401(k) or a traditional IRA, a Roth IRA allows you to contribute after-tax dollars, earn tax-free growth, and make tax-free withdrawals, subject to some basic conditions. Even though Roth IRA is an advanced version of the traditional IRA, it significantly differs in eligibility criteria, investment options, taxation, withdrawal conditions, and more. Over the last couple of years, people from all age groups have been drawn to Roth IRAs. According to a Fidelity survey, over half of the traditional IRA contributions are redirected to Roth IRAs, especially from people between the ages of 23 and 38. Further, in 2018, 41% of the new Roth IRAs were opened by the millennial generation, highlighting the popularity of Roth IRAs even among the younger investors.
For 2022, you can use a Roth IRA to amplify your retirement savings. However, it is important to understand the contribution limits, changes, eligibility criteria, and the overall functioning of a Roth IRA before tapping this retirement savings vehicle. To gain better insight about Roth IRAs and how they work, you can contact a professional financial advisor who can guide you through the same.
Here is what you need to know about 2022 Roth IRA contribution limits and changes:
Roth IRA contribution limits 2022
The IRS (Internal Revenue Service) allows you to contribute after-tax dollars in a Roth IRA subject to the maximum contribution limits. For 2022, the maximum Roth IRA contribution is $6,000 for those younger than 50 years. However, if you are 50 or older, the IRS allows you to take advantage of catch-up contributions and contribute a maximum of $7,000 in 2022. The IRS also mandates that Roth IRA contributions only come from earned income, such as salary, wages, business profits, freelance work, commission, bonus, and assignment work. Interest, dividend income, child support, rental income, unemployment benefits, Social Security benefits, pension, and annuity income are not earned. Therefore, you cannot contribute from these earnings towards your Roth IRA. If you receive any disability retirement benefits, the IRS considers the sum an earned income. However, this exception is permissible only up to the age of an annuity or pension if you do not have any disability.
If your earned income is lower than your permissible contribution limit, you can only contribute the sum equivalent to your earned income. For instance, if your tax filing status and income limits allow you to contribute $6,000 in 2022 to your Roth IRA, but your earned income is only $4,000, then you can only contribute $4,000 and not $6,000 in your Roth IRA for 2022.
You can have more than one Roth IRA in your name. You could even have more than one type of IRA, such as multiple Roth IRAs, traditional IRAs, SEP (Simplified Employee Pension) IRAs, etc. However, irrespective of the number of Roth IRAs you hold, $6,000 and $7,000 are the consolidated contribution ceilings for all types of IRAs in your name. If you contribute above the Roth IRA limits 2022, the IRS levies a 6% penalty every year until you rectify the error. That said, in the case of an IRA rollover, these contribution limits are not applicable. In an IRA rollover, you transfer funds from existing retirement saving accounts (like a 401(k) into an IRA).
Roth IRA income limits 2022
Your eligibility to contribute to a Roth IRA is subject to your income level. If you are earning more than a specific amount annually, the IRS restricts you from contributing to a Roth IRA. Broadly, if you file taxes as a single person, you can contribute to a Roth IRA only if your Modified Adjusted Gross Income (MAGI) is less than $144,000 for the tax year 2022. For 2021, the income limit was $140,000. Alternatively, if you are married and file taxes jointly, the IRS allows you to contribute to a Roth IRA only if your MAGI is under $214,000 for the tax year 2022. For 2021, MAGI for joint tax filers was capped at $208,000.
Here is a detailed table that can help you understand the MAGI limits and permissible contribution allowance for Roth IRA in 2022:
| Tax Filing Status | MAGI 2022 | MAGI 2021 | Permissible Contribution |
| Married filing jointly
A qualifying widow(er) |
Under $204,000 | Under $198,000 | $6,000
$7,000 (for those above 50) |
| Married filing jointly
A qualifying widow(er) |
Higher than or equal to $204,000 but under $214,000 | Higher than or equal to $198,000 but under $208,000 | Can contribute an amount lower than the maximum ceiling |
| Married filing jointly or a qualifying widow(er) | Higher than or equal to $214,000 | Higher than or equal to $208,000 | No contribution allowed |
| Married filing separately
(lived with spouse at any time during the year) |
Under $10,000 | Under $10,000 | Can contribute an amount lower than the maximum ceiling |
| Married filing separately
(lived with spouse at any time during the year) |
Higher than or equal to $10,000 | Higher than or equal to $10,000 | No contribution allowed |
| Single, head of the house, or married filing separately
(not living with the spouse at any time during the year) |
Under $129,000 | Under $125,000 | $6,000
$7,000 (for those above 50) |
| Single, head of the house, or married filing separately
(not living with the spouse at any time during the year) |
Higher than or equal to $129,000 but under $144,000 | Higher than or equal to $125,000 but under $140,000 | Can contribute an amount lower than the maximum ceiling |
| Single, head of the house, or married filing separately
(not living with the spouse at any time during the year) |
Higher than or equal to $144,000 | Higher than or equal to $140,000 | No contribution allowed |
Depending on your tax filing status and MAGI combination, you can determine the amount you can contribute to your Roth IRA for 2022. If you are eligible to make the maximum contribution, you can proceed without any delay. However, if you can contribute to a Roth IRA but only up to a reduced limit, you will need to calculate your permissible Roth IRA contributions for 2022 by using the following steps:
- Step 1:Know your MAGI and subtract the applicable figure from your MAGI.
- $204,000 for married, filing jointly, or a qualifying widow(ers).
- $0, for married, filing separately and living with spouse any time during the year.
- $129,000 for the rest of the situations.
- Step 2: Divide the result from Step 1 by one of the applicable conditions below:
- $10,000, for married, filing jointly, or a qualified widow(er).
- $10,000, for married, filing separately and living with your spouse any time during the year.
- $15,000, for the rest of the situations.
- Step 3:Multiply the result from Step 2 with the maximum annual contribution limit ($6,000 and $7,000 (50 years or older).
- Step 4:Subtract the result from Step 3 from the maximum contribution limit. Do not make any reductions.
After following the above four steps, the answer you get is the maximum amount you can contribute to a Roth IRA per your tax status and income eligibility.
What is the penalty for higher contributions in 2022?
It is advisable to max out your Roth IRA contributions for optimum savings. However, if you go overboard and contribute above the IRS specified limit, the IRS considers the contribution as ineligible. If you contribute in excess or contribute to a Roth IRA even after a high income, the IRS will levy a 6% penalty on the surplus sum until you correct the mistake.
Here are some ways through which you can rectify this error:
- Withdraw the extra money, including any earnings on it from your Roth IRA before the tax deadline for the financial year.
- In case you have already filed the tax returns for the said year, withdraw the surplus money and its earnings from your Roth IRA and file an amended tax return for the financial year.
- Carry forward the excess contribution to the next year and contribute a sum after deducting the adjusted contribution in the following year. You will pay a 6% penalty in that year, but nothing from then onwards.
- Withdraw the extra funds by Dec 31 next year. This means you will pay 6% for two years but no penalty after that.
You can use these methods to rectify your excess contribution mistakes. However, ideally, the aim is to be careful about the contribution limits each year, check your income eligibility, and map your tax filing status to precisely determine your qualified annual contributions for a Roth IRA.
Saver’s Credit income limits for 2022
If you make eligible contributions to your IRA or another employer-sponsored retirement plan, you can also claim a tax credit for those contributions. This tax credit is also known as Saver’s Credit. Saver’s Credit reduces the tax liability, bolstering your savings potential by balancing the cost of funding a retirement account like a Roth IRA.
Amount of Saver’s Credit
Your Saver’s Credit depends on your adjusted gross income as reported on the Form 1040 series. The amount of your credit is 50%, 20%, or 10% of:
- Your contributions to a Roth IRA or Traditional IRA
- Your contributions to a 401(k), 403(b), SIMPLE plan, etc.
- Your after-tax contributions made to a qualified retirement plan
- Your contributions to a 501(c)(18)(D) plan
- Your contributions to an ABLE account (as a designated beneficiary).
Rollover contributions do not qualify for Saver’s Credit. The maximum contribution amount that can qualify for Saver’s Credit depends on your tax filing status.
2022 Saver’s Credit
| Applicable Credit | Married Filing Jointly | Head of House | Single, Married Filing Separately, or Qualifying Widow(er) |
| 50% of your contribution | AGI less than $41,000 | AGI less than $30,750 | AGI less than $20,500 |
| 20% of your contribution | $41,000-$44,000 | $30,751-$33,000 | $20,501-$22,000 |
| 10% of your contribution | $44,001-$68,000 | $33,001-$51,000 | $22,001-$34,000 |
| 0% of your contribution | Above $68,000 | Above $51,000 | Above $34,000 |
Eligibility for Saver’s Credit
You can claim the Saver’s Credit if you are:
- Above 18 years of age
- Not listed as a dependent on another person’s tax return
- Not a student
You can use this example to better understand the applicability of Saver’s Credit:
Let us assume that you are married and you earned $41,000 in 2022. However, your spouse was unemployed and did not have any earnings for the year. You contributed $3,000 to your Roth IRA for 2022. After your Roth IRA deduction, your AGI on the joint tax return is $38,000. In this case, you can claim a 50% Saver’s Credit of $1,500 on your $3,000 Roth IRA contributions in your 2022 tax return.
To summarize
These are some of the most critical guidelines of a Roth IRA that you should know and understand in 2022. For more detailed assistance, you can also consult a professional financial advisor and get expert guidance on utilizing a Roth IRA and related benefits for your future retirement financial security.
To learn more about suitable retirement savings strategies for your unique financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.