In its annual review of 401(k) limits, the IRS has come to the decision that seems to be perennial. The IRS is going to raise 401(k) limits in an effort to combat the ever-rising inflation. However, in an interesting twist the IRS has also provided taxpayers with guidance related to what has become known as the backdoor Roth IRA.
In 2022, taxpayers can contribute the lesser of 100% of their salaries or $20,500 to a 401(k) plan. This is an increase of $1,000 from tax year 2021. Taxpayers ages 50 and over are allowed to contribute an additional amount, known as a “catch-up” contribution. However, in 2022, the catch-up contribution limit remains at $6,500. As a result, workers 50 and older can kick in a maximum of $27,000 to their 401(k) plans in tax year 2022.
So what is a backdoor Roth IRA? It’s a strategy used by taxpayers to get money into a Roth IRA, even if they earn more than IRS income limits. For example, for tax year 2022, joint filers can’t contribute to a Roth IRA if they have a modified adjusted gross income of above $214,000. For single filers, the limit is $144,000. The solution in both of these cases is the backdoor Roth IRA.
Some high earners should be warned: the days of the backdoor Roth IRA may be numbered. Under the Build Back Better Act, the proposed income limits would be changed to $400,000 for single filers and $450,000 for joint filers. But for most people, the backdoor Roth IRA would become obsolete since their income would fall well below the threshold.