Here are three basics that everyone, retired or not, should know about their plan.
What are the contribution maximums for 2022?
If you are under age 50, you can contribute $20,500 of pre-tax income to your 401(k) this year (2022). That’s a $1,000 increase from 2021. If you’re 50, or older, you have the option to add a “catch up” contribution of $6,500, which means that this year you can sock away a total of $27,000 of pre-tax money in your 401(k). (And, I should note that if you save in both a Roth 401(k) and traditional, pre-tax 401(k), these totals are your combined limit.)
The beneficiaries in your 401(k) usually supersede those in your will.
When was the last time you checked the beneficiaries on your defined contribution plan? I’m specifically talking about a 401(k), 403(b), or 457.
Most people have no idea that the following law applies: The beneficiary listed on your defined contribution plan typically takes legal precedence over whoever is listed in your will.
That shocks most people, but it’s true.
If you can’t remember the last time you checked, or you aren’t 100% positive who you have listed, take a minute today and verify that your beneficiaries are up to date.
RMDs now begin at age 72.
Required minimum distributions (RMDs) are mandatory yearly withdrawals you must take from your employer-sponsored retirement plan each year once you reach age 72 (until recently, the age RMDs began was 70 1/2).
RMDs exist so the IRS can start collecting their cut of the money from tax-deferred accounts.
Your RMD is calculated by dividing your prior year balance by a life expectancy factor (speak to your advisor) based on an IRS table. (If you are married and your spouse is 10 years younger, a different table is applied).
A little warning: Do not automatically wait until age 72 to take a required minimum distribution (RMD). The reason is, that if you’ve saved exceptionally well, and you wait until you turn 72, you may come to find that your RMD is so large, it bumps you into a higher (and avoidable) tax bracket.
Miscalculations cost people tens of thousands of dollars, so speak with your tax professional now to review all the money (and income) you’ll be using for retirement, so you don’t get hit with an unnecessarily large tax bill.