Step 2: Maximize retirement contributions
IRA contributions can be made until the tax-filing deadline in April, meaning that an investor can use the next 3½ months to maximize their 2021 contributions. Alternatively, for investors making 2022 contributions, they have more than 15 months – or until April 2023 – to fund their accounts. That said, it’s advantageous to invest in an IRA as early as possible in the year to fully benefit from the power of compounding.
Notable for 2022 is the IRS’ decision to raise the contribution limit on 401(k)s, 403(b)s, and most 457 plans to $20,500, up from $19,500 in 2021 (for those 50 years old or older, they can contribute an additional $6,500 in 2022, a figure that remains unchanged from 2021, bringing the total to $27,000). Investors should review their employer-sponsored plan and aim to maximize these contributions or look to see if there is additional cash flow (for example, if an individual recently received a raise) to direct toward retirement accounts.
In general, I advise my clients to contribute at least 12%-15% of their salary, including any employer contributions, to retirement savings. At the very least, contribute enough to earn the full employer match.
Additionally, because it is a new tax year, it could be an opportunity for some investors to consider converting a traditional IRA to a Roth IRA. Depending on an investor’s tax bracket for 2022 in comparison to prior years or anticipated future years, assess whether a Roth conversion in 2022 makes sense. For example, if an investor just retired and has less earned income, they could pay taxes on the Roth conversion at a lower rate than when they were working.
Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.