Probably the best, most time-tested method of saving money for retirement is to use individual retirement accounts (IRAs). There are many different types of IRAs, allowing pre-tax or post-tax contributions, employer-sponsored or personal, and even some designed for armed forces members. The type of IRA will dictate how much you are allowed to contribute to the account each year. Contribution limits set by the IRS determine your maximum allowed contribution, which can help you understand how to take full advantage of your retirement savings.
How do retirement account contribution limits work?
Contribution limits are placed on retirement accounts so that high-income earners can’t unfairly take advantage of tax-free savings. However, contribution limits aren’t set in stone, because inflation is constantly changing. Therefore, the IRS decided to make retirement account contribution limits indexed to inflation, meaning they are reassessed each year and increased by the prevailing rate of inflation, more or less.
Some years (like in 2020) contribution limits aren’t changed because inflation isn’t quite bad enough to merit it. However, in years like 2021, a thirty-year-high inflation rate has a big impact on both spending power and contribution limits. It’s important to note that these contribution limits apply to retirement accounts differently, based on the account type.
Digital Asset IRAs
Digital assets are a growing new asset class in the 21st-century. And for those that want to couple digital asset investing with a tax-advantaged retirement account, a Digital IRA, or cryptocurrency IRA, is the best choice. To invest in a Digital IRA, you will need a self-directed IRA (SDIRA), which gives you more access and control over your investments than traditional retirement accounts.
A self-directed IRA can be funded from rollovers of most types of retirement accounts like 401(k)s, SEP, and SIMPLE retirement plans.
What’s new for 2022?
In 2022 retirement account contribution limits have been slightly modified for inflation. Traditional and Roth IRA contribution limits remain unchanged at $6,000 for 2022. On the other hand, 401(k) account holders will see their contribution limit increase from $19,500 in 2021 to $20,500 in 2022.
Changes to retirement account contribution limits
Here is a summary of the contribution limit changes to every type of retirement account for the 2022 tax year. Details on each retirement account type are listed below the table.
| Account Type | 2022 Contribution Limit | 2021 Contribution Limit | 2022 Catch-up contribution limit (> age 50) | 2021 Catch-up contribution limit (> age 50) |
| Traditional IRAs | $6,000 | $6,000 | $1,000 | $1,000 |
| Roth IRAs | $6,000 | $6,000 | $1,000 | $1,000 |
| 401(k)s | $20,500 | $19,500 | $6,500 | $6,500 |
| SIMPLE IRAs | $14,000 | $13,500 | $3,000 | $3,000 |
| SEP IRAs | $61,000 or 25% of net earnings | $58,000 or 25% of net earnings | N/A | N/A |
| 403(b)s | $20,500 | $19,500 | $6,500 | $6,500 |
| 457(b)s | $20,500 | $19,500 | $6,500 | $6,500 |
| TSPs | $20,500 | $19,500 | N/A | N/A |
| HSAs | Individual – $3,650
Family – $7,300 |
Individual – $3,600
Family – $7,200 |
N/A | N/A |
Types of retirement accounts
Traditional IRAs
A Traditional IRA is a retirement savings account in which pre-tax dollars are invested. Because it’s pre-tax, any money invested into a Traditional IRA is not taxed today, thereby lowering your income (and today’s income taxes, too). However, any money you withdraw during retirement will be subject to income taxes.
Anyone can invest in a Traditional IRA, regardless of employment status or income. This makes Traditional IRAs the most accessible retirement savings vehicle available.
Roth IRAs
Instead of investing pre-tax dollars toward retirement, Roth IRAs allow you to invest after-tax dollars. The difference is that by paying taxes on contributions today, savings you withdraw in retirement are completely tax-free. But unlike Traditional IRAs, not everyone can invest in a Roth IRA as the retirement account is limited by income.
For instance, in 2021, the income limits for the full Roth IRA contribution were $125,000 and $198,000 for individual and joint filers, respectively. These income limits are now changing to $129,000 and $208,000 for 2022.
401(k)s
As an employer-sponsored retirement account, 401(k)s are managed and controlled by your employer. Your employer may offer a Traditional 401(k) option, a Roth 401(k) option, or both.
Generally, a 401(k) plan allows you to choose investments from a pre-selected list set by your employer. A benefit of a 401(k) is that your employer may contribute additional funds toward your balance, which is essentially “free” money for retirement.
SIMPLE IRAs
A SIMPLE IRA — short for Savings Incentive Match Plan for Employees — is a retirement plan for smaller employers. SIMPLE IRAs have lower costs and expenses than 401(k)s, while allowing for higher contribution limits than Traditional IRAs. This type of retirement account is most often found among small businesses.
SEP IRAs
In a Simplified Employee Pension (SEP) IRA, an employer contributes funds directly to their employees’ IRA plans. Most often, SEP IRAs are used by self-employed individuals who can increase their IRA contribution limits through the retirement account.
403(b)s
403(b)s are similar to 401(k)s for nonprofit organizations and public school systems. 403(b)s have identical contribution limits and restrictions as 401(k)s and some added benefits like shorter vesting periods for contributions and an exemption from nondiscrimination testing (a test to ensure an employee-sponsored retirement program doesn’t unfairly favor highly-compensated employees and owners).
457(b)s
Employees of state and local governments have their own type of retirement account known as a 457(b). A 457(b) account is similar to a Traditional IRA in that it allows for pre-tax contributions.
Thrift Savings Plans (TSPs)
A Thrift Savings Plan (TSP) is a type of retirement account restricted to members of the armed forces and employees of the federal government. TSPs are the most limited type of retirement account, with only six funds available for investment. However, TSPs are very beneficial as they have high contribution limits and no income restrictions.
HSAs
Another way to save money on taxes is through a Health Savings Account (HSA). You can deposit money into an HSA to pay for qualified medical expenses. This money is deposited pre-tax, and therefore exempt from federal taxes.
However, HSAs are only available for those who have high-deductible health insurance plans: $1,400 for an individual or $2,800 for those with family coverage.
What does this mean for Digital IRAs?
With growing interest in new technology, 2022 looks to be a strong year for digital currencies. And with an increase in contribution limits for many standard retirement accounts, individual investors are set to benefit from investing more tax-advantaged money into this new and growing asset class.
While future growth is unpredictable and entirely speculation, many experts expect cryptocurrencies will have massive growth in the coming years, all the more reason to reduce future taxes through an SDIRA.
While contribution limits are changing, it’s essential to know that this won’t change your ability to invest in digital assets via these tax-advantaged retirement accounts. In fact, with higher contribution limits, you can now consider investing even more into a Digital Asset IRA.
BitIRA is here to help you navigate your Digital Asset IRA needs, whether it be opening a new SDIRA account, rolling over an existing account, or maxing out your contributions for the coming year. Get in touch with BitIRA today to learn more about how you can maximize your retirement savings through digital assets.