401(k) Contribution Limits for 2022: What They Are and Why They Exist

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A 401(k) plan is one of the most popular options available to help workers save for retirement. This type of plan, offered by many private-sector employers in the United States, allows both employees and employers to set aside money for a worker’s retirement.

But as with many tax-advantaged accounts, there’s a limit as to how much you can contribute to a 401(k) plan. These limits, set by the IRS, are occasionally adjusted for inflation and represent how much both individuals and their employers can defer in a 401(k) plan each year.

In this article, you’ll learn the 401(k) contribution limits for 2022, how they differ from last year, and why you should contribute the full allowable contribution.

401(k) Maximum Contribution Limits Year Over Year Comparison

In 2022, the IRS allows workers to contribute up to $20,500 to an employer-sponsored 401(k) plan, up $1,000 from 2021 and 2020. Additionally, workers age 50 or older can contribute an additional amount — known as a catch-up contribution — of $6,500.

What many people may not realize is the IRS individual contribution limit isn’t necessarily the maximum that can go into your 401(k) in a year. Employers can also contribute to their employees’ accounts up to a combined limit. This is also known as an employer match. Not every employer matches so contact your company’s HR department to get more information. 

Pro Tip

If you don’t contribute up to the IRS contribution limit, consider investing at least enough to claim your full employer match.

Overall annual contributions to a 401(k), which includes employer contributions, is $61,000 for 2022. For people 50 and older, the limit goes up to $67,500, which includes the catch-up contributions. 

The chart below shows the three different contribution limits set by the IRS, along with how they differ from 2021 to 2022.

Individual Contributions$20,500$19,500
Catch-Up Contributions$6,500$6,500
Total Contributions$61,000$58,000
Total Contributions (Including Catch-Ups, For Workers Over 50)$67,500$64,500

Why Is There a Maximum Contribution to a 401(k)?

The IRS limits the amount that individuals can contribute to a 401(k) plan — as well as other tax-advantaged retirement accounts — because of their tax benefits. Depending on the type of contributions you make (traditional or Roth), a 401(k) allows you to either defer taxes on your contributions until retirement or pay taxes now.

“Having these limits allows people with lower income to have potential access to savings vehicles and greater market share return while limiting the amount that higher-income earners can deduct,” said Mindy Yu, the Director of Investing at Betterment at Work.

Without limits on tax-advantaged contributions, high earners could easily shelter large portions of their income in a 401(k), helping them to avoid much of their tax burden. Contribution limits help to prevent that.

Should I Hit the Max Contribution to My 401(k)?

There’s no doubt that $20,500 is a lot of money, and you may find yourself wondering whether it’s really worth contributing the maximum each year. The short answer, as with many things in finance, is: it depends.

Contributing the maximum amount allowed to your 401(k) every year would likely set you up for a very comfortable retirement. In fact, a monthly contribution of $1,708.33 (which equates to $20,00 per year) for 30 years with an 8% average return would leave you with more than $2.3 million, according to a compound interest calculator.

That being said, deferring such a large amount of income each year may not be possible for many workers. According to the Bureau of Labor Statistics, the mean annual wage as of May 2020 was $56,310. Hitting the 401(k) maximum contribution would eat up more than 36% of that amount.

The key is to contribute enough to reach your retirement goals. Using an online retirement calculator, you can plug in your desired income during retirement and your current amount saved to get an idea of how much you should be saving per month to reach your goals.

Additionally, even if you decide saving $20,500 per year isn’t a realistic goal for you, consider what type of match your employer offers, and contribute at least that much.

“What I would try to do is go at least up to the company match in the 401(k) match,” said Brian Carney, a CFP and the co-founder of RiversEdge Advisors. “It’s literally free money, and so many Americans leave money on the table by not taking advantage of the free money their employer has offered to them.”

And just as there are people who aren’t sure if they should contribute the full $20,500, others on the opposite end of the spectrum may have maxed out their 401(k) contributions and wonder how they can save more. For that, there are other tax-advantaged retirement accounts available, including a traditional IRA and Roth IRA.

“I love a Roth IRA,” Carney said. “The benefit of a Roth IRA is while you don’t get a tax deduction on the money you put into the plan now, you never have to pay tax on it ever again. The analogy we use is you’re paying tax on the seed and not the harvest.”