Harry Sit's Blog, page 23

What If Backdoor Roth and Mega Backdoor Roth Die in 2022?

[Updated and rewritten on December 19, 2021 after Congress decided to postpone the legislation to 2022.]

President Biden and Congress have been working on the Build Back Better legislation for some time. The House already passed a bill. The Senate has come up with a draft bill. There are some differences between the two versions and there are still some disagreements in what exactly should go into the Senate bill. However, one thing not in disagreement is that Congress wants to ban the backdoor Roth and the mega backdoor Roth. Both the House and the Senate agree this will be part of the Build Back Better package if and when it passes.

These changes, if they become law, will have these effects:

IRAEmployer PlanMake non-Roth after-tax contributionAllowedAllowedConvert pre-tax money to RothAllowed*Allowed*Convert after-tax money to RothNot allowedNot allowed

* Allowed for everyone through 2031. Still allowed after 12/31/2031 unless your income is above $400k (single) or $450k (married filing jointly).

You can still make non-Roth after-tax contributions, but you can’t convert those non-Roth after-tax contributions to Roth. This ban covers converting after-tax money from a traditional IRA to a Roth IRA, rolling over after-tax contributions from an employer plan to a Roth IRA, and converting after-tax money in an employer plan to the Roth account within the plan.

Due to the disagreements in other parts of the bill unrelated to backdoor Roth and mega backdoor Roth, Congress decided to continue their discussion in 2022. If and when they finally reach an agreement, the effective date will be sometime in 2022 or later.

What should you do if these proposed changes move forward and become law in 2022?

Roth Conversion Isn’t Backdoor Roth

First of all, many people confuse backdoor Roth with a plain vanilla Roth conversion. Although backdoor Roth uses Roth conversion as its second step, a straight-up Roth conversion of pre-tax money isn’t backdoor Roth.

The bills in the House and the Senate allow converting pre-tax money to Roth by anyone for at least 10 years through the end of 2031. Starting in 2032, only those with a high income won’t be allowed to convert pre-tax money. That’s 10 years from now. Who knows what will change by then. If you’re only worried about a plain vanilla Roth conversion, please understand it isn’t affected for at least 10 years.

Backdoor Roth – 2021

If the proposals become law in 2022, you’re still allowed to make nondeductible contributions to a traditional IRA but you won’t be allowed to convert them to Roth after an effective date to be determined but it doesn’t affect converting to Roth on or before 12/31/2021.

If you’re planning to make the nondeductible traditional IRA contribution for 2021 between January 1 and April 15 in 2022, hurry up. Make the contribution for 2021 now and convert it to Roth before December 31, 2021. If you wait until 2022 to make your nondeductible contribution, it’s possible you won’t be able to convert to Roth and your contribution will be stuck in the traditional IRA.

If you’re planning to contribute or if you already contributed to your Roth IRA directly and there’s any chance that you will exceed the income limit for 2021 ($125,000 single, $198,000 married filing jointly), make it a backdoor Roth now. When you find you exceed the income limit, normally you can recharacterize your Roth IRA contribution to a nondeductible traditional IRA contribution and convert it in the following year but it’s possible you won’t be able to do that in 2022. So go through the backdoor now. Make a nondeductible contribution to a traditional IRA and convert before 12/31/2021.

In either case, you have to do some work to prepare for the backdoor Roth. See Backdoor Roth: A Complete How-To.

Mega Backdoor Roth – 2021

If your employer’s plan allows non-Roth after-tax contributions, make sure you contribute the maximum allowed in 2021 and convert them before 12/31/2021.

Some plans do an automatic conversion on the same day. You’re covered if you signed up for the automatic conversions. If your plan doesn’t offer automatic conversion and you forget to convert manually, it’s possible your non-Roth after-tax contributions will be stuck.

What About 2022?

As the President and Congress continue their discussion into 2022, we don’t know what the final outcome will be. If you normally do the backdoor Roth in January, should you proceed as usual or should you wait until it’s clear which way it will go? If you’re currently making non-Roth after-tax contributions to an employer plan, should you continue or pause those after-tax contributions?

I see these four possible scenarios:

1. Law Doesn’t Change

It’s possible the discussion reaches an impasse and the bill doesn’t pass in the Senate. If you proceed as usual, you’ll get your backdoor Roth in January. If you wait until say May to learn that the legislation died, you still have time to complete your backdoor Roth and mega backdoor Roth. The difference is only in when, not whether, you complete your backdoor Roth and mega backdoor Roth.

2. Law Changes, Effective 1/1/2023

It’s also possible that the bill passes in the Senate in 2022 with a ban of backdoor Roth and mega backdoor Roth effective 1/1/2023. As far as 2022 is concerned, this is the same as the previous scenario. Either way you’ll get it done in 2022 and the only difference is in which month.

3. Law Changes, Effective Mid-Year with No Advance Warning

Another possibility is the bill passes with no advance warning. Say the bill passes on March 10 with an effective date of March 11. They often do that to avoid a last-minute mad dash to beat the clock. By the time the law changes, it’s already too late to make any changes. Meanwhile, those who performed backdoor Roth and mega backdoor Roth before the effective date won’t be affected.

In this scenario, you’re better off doing the backdoor Roth and mega backdoor Roth before the law changes. You snooze, you lose.

4. Law Changes, Effective 1/1/2022

It’s also possible that the tax law changes will be made retroactive to January 1. It’s legal and it happened before.

Currently, a Roth conversion or an in-plan Roth rollover can’t be reversed. If you already completed the conversion before it’s made illegal retroactively, I imagine they will also give you a one-time exemption to undo it. If you go ahead under the current law, you’ll have the hassle of unwinding your conversion.

In summary,

Proceed as UsualWaitBill fails$$ in Roth$$ in RothLaw changes, effective 1/1/2023$$ in Roth$$ in RothLaw changes mid-year$$ in Rothmiss opportunityLaw changes retroactively to 1/1/2022unwind conversionno extra work

Whether you should go ahead as soon as you can or wait until it’s clear on how the law will change depends on how badly you don’t want to miss an opportunity versus how much you hate the possible hassle of having to undo a conversion. To me personally, I will proceed as usual, but only you can make the decision for yourself.

A Big Loss?

Is it a big loss if the proposed changes become law and you can’t do backdoor Roth and mega backdoor Roth anymore?

It’s a loss because tax-free growth beats tax deferral on the earnings or the lower tax rates on qualified dividends and long-term capital gains. However, the power of saving and investing comes from making the contributions to begin with, not from how the investment returns are taxed.

A taxable account always works. In the end, even if all the tax-advantaged accounts go away and all the returns are taxed as regular income, those who save and invest more will still succeed. You take advantage of all available tax savings but you can’t stake your success on specific tax breaks.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Buy I Bonds for Your Business: Sole Proprietorship, LLC, S-Corp

I covered buying I Bonds in a trust and in previous posts. This time we look at buying I Bonds in the name of a business. For background on I Bonds in general, please read How To Buy I Bonds.

Table of ContentsA Business Is Separate From the OwnerA Business’s Investments Belong to the BusinessEntity Accounts at TreasuryDirectBuying and Cashing OutKeep Them SeparateWhen the Business EndsAfter You DieA Business Is Separate From the Owner

Many people have a business when they sell products or provide services. Some people have a separate LLC for each of their rental properties. A key principle in business is that a business is separate from its owner. When you buy flowers from Carol’s Flowers you’re buying from Carol’s business, not from Carol herself.

A business may be organized as a sole proprietorship, a partnership, an LLC, an S-Corp, or a C-Corp. An LLC, S-Corp, or C-Corp usually requires registering with the state. A sole proprietorship or a partnership may have a fictitious name filing (“DBA”) with the state or the county. Some counties and cities also require business licenses. Having any of these shows it’s a business. The business exists separately from the owner as a person.

An S-Corp or a C-Corp has a separate tax ID (“EIN”). An LLC or a sole proprietorship can have an EIN or it can use the owner’s Social Security Number as its tax ID. Which tax ID a business uses and how the business is taxed don’t change the fact the business is still a separate entity from the owner as a person.

A Business’s Investments Belong to the Business

A business as a separate entity can (and should) have its own bank account to keep the business’s financial affairs separate from the owner’s personal financial affairs. In addition to receiving revenue, paying business expenses, and paying the owner, the business can invest its excess cash in stocks, bonds, mutual funds, ETFs, real estate, and what have you. And that includes I Bonds as well.

All the business’s assets, including cash in the bank, vehicle, equipment, inventory, and all its investments still belong to the business. If the business changes ownership, the new owners get everything the business owns. If the business gets a judgment against it, all the assets the business owns are subject to the judgment. This creates a risk in keeping financial assets in the business’s name.

Entity Accounts at TreasuryDirect

If you’re OK with the risk of buying I Bonds in the name of your business, you can open an entity account for your business at TreasuryDirect. A business can buy up to $10,000 per calendar year. If you own multiple business entities, each separate business entity can buy up to $10,000 per calendar year in its own separate account.

Choose the correct business type that corresponds to your business and go from there.

You’ll be the Account Manager of the business account. You can give the same email address that you use on a personal account with TreasuryDirect. The business account at TreasuryDirect should link to the business’s bank account, not your personal bank account. Write down the account number you receive by email after you open the account. You’ll need it to log in.

Repeat the process if you have multiple business entities.

Buying and Cashing Out

You use the excess cash in the business to buy I Bonds. If you normally pay out the cash as an owner’s draw, that money has to stay in the business now, which reduces your owner’s draw. If your business is a pass-through entity (sole proprietorship, LLC, or S-Corp), you’re still taxed on the money even if you don’t actually pay out the draw.

When you cash out I Bonds in the business account, the money goes to the business’s bank account. You can do whatever you normally do with any cash in the business’s bank account, including paying out to the owner. TreasuryDirect will generate a 1099-INT form with the business’s tax ID. They don’t mail a paper 1099 form. You’ll have to remember to log in next year and download or print the 1099 form.

If the business files a separate tax return (C-Corp, S-Corp, partnership, or LLC taxed as an S-Corp or a partnership), the business has to include the interest income on its tax return. If the business issues a K-1 form to the owner, the interest income also goes on the K-1 form, which the owner uses to include on their personal tax return.

Keep Them Separate

Similar to a trust account, when the business is ongoing, you should keep the business account and the personal account separate and avoid transferring from one to another when you’re buying the maximum in both accounts in the same year. You’ll get a stern warning if you buy the maximum in both accounts and transfer from one account to the other in the same year.

When you’re done buying all the I Bonds you want and you’d like to consolidate your holdings into one account, transfer in a year when you’re not buying I Bonds. Use FS Form 5511.

When the Business Ends

Before you wind down the business, you should dispose of the business’s assets and liabilities. Your authority to transact on behalf of the business ends when the business ceases to exist. So either sell or transfer the business’s assets to the owner(s) before you shut down the business.

If you’d like to keep the I Bonds as I Bonds as opposed to cashing out, you can transfer the bonds in the business account to the owner’s personal account.

After You Die

A business account in TreasuryDirect can’t designate a second owner or a beneficiary. If you die, whoever takes over the ownership of the business also takes over the I Bonds the business owns. The new owner needs to change the business account’s Account Manager with FS Form 5446.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Buy I Bonds in Your Kid’s Name: You Can, But Should You?

As news on I Bonds spreads, some people are looking for ways to buy more I Bonds beyond the limit of $10,000 per person per calendar year. Buying in a trust account is one way. Buying in your kid’s name, buying for your business, and buying as a gift are some other ways. We’ll start with buying in a kid’s name in this post. For background on I Bonds in general, please read How To Buy I Bonds.

Table of ContentsKids Can Invest Too529 Plan Is Better for CollegeKiddie TaxMinor Linked AccountCashing OutReaching AdulthoodKids Can Invest Too

First of all, we’re talking about kids under 18 here. Adult children are adults. They can buy I Bonds in the same way as any other adult. If your adult children don’t have spare cash you can give them money and they can use the money to buy I Bonds (or anything else). If you’d like to buy I Bonds and then give the bonds to them as a gift, that’s buying as a gift. We’ll cover buying I Bonds as a gift in a different post.

Kids can invest too, not only in I Bonds but also in other investments such as mutual funds, ETFs, etc. Because kids can’t legally agree to terms and conditions when they’re a minor, an adult has to open an account for them and act as a custodian. These accounts are typically called UTMA accounts, which are named after the law that governs custodial accounts: Uniform Transfer to Minors Act.

If you already have UTMA accounts for your kids and you’re just diversifying part of their investments into I Bonds, you can skip some of the discussion on whether you should open an account in your kid’s name in the first place.

Money In a Kid’s Name

Money in your kid’s name belongs to your kid. You’re only holding the money and investing on their behalf until your kid becomes an adult. Even if you gave the money to your kid to begin with, you can’t take the money back or spend it willy-nilly. You can spend money from the kid’s account but it has to be on something that specifically benefits the kid. Spending the money on their sports uniforms and equipment may be OK but not for general household expenses.

As the custodian, you can decide to invest your kid’s money in mutual funds, ETFs, or I Bonds. Once your kid becomes an adult, your duty as the custodian is over and you must turn over the investments to the kid. If they decide to blow the money on a Tesla or travel to Antarctica, that’s their prerogative.

529 Plan Is Better for College

If you intend to use the money for your kid’s college expenses, it’s probably better to put the money in a 529 plan than a custodial account. Depending on where you live, you may get a state tax deduction or credit for contributing to a 529 plan. Earnings in a 529 plan are tax-free when the money is distributed for qualified college expenses whereas earnings in a custodial account are taxable.

When the I Bonds are in the kid’s name, the interest is still taxable even if the bonds are cashed out for their college expenses. When the I Bonds are in a parent’s name, it’s possible that the interest is tax-free when they’re used for a child’s qualified college expenses. However, many high-income parents don’t meet the qualifying income limit to make it tax-free.

If your kid is still young, money in a 529 plan can be invested in stocks for possibly better returns whereas I Bonds at current rates only match inflation. When your kid is ready to go to college, money in a 529 plan is also treated more favorably in financial aid considerations than money in a custodial account.

Kiddie Tax

If the money isn’t for college expenses but for some other expenses specifically for the kid, there are some limited tax benefits to put the money under your kid’s name as opposed to keeping it in your own name.

When you redeem I Bonds under your kid’s name (either to transfer to a custodial account elsewhere or to spend specifically for their benefit), the accumulated interest is taxable. The first $1,100 in interest income covered by the kid’s standard deduction is tax-free. The tax on the next $1,100 is at the kid’s tax rate, which starts at 10% when they have no other income. The tax on interest income above $2,200 is at your tax rate, which would be the same had you kept the money in your own name.

So the tax benefit of putting money in your kid’s name is limited to the first $2,200 in investment income. Your kid pays a blended 5% on $2,200 versus you pay at your marginal tax rate. You need to file a tax return on behalf of your kid to realize the tax savings. The kid’s tax return is relatively simple when they don’t have other income. Downloaded tax software offers five federal e-files for this purpose.

Minor Linked Account

After considering the limitations of holding money in your kid’s name, the possibly better alternative of simply adding to their 529 plan, the limited tax benefits, and having to file a tax return for your kid, if you still want to buy I Bonds in your kid’s name, here’s how.

First, log in to your own TreasuryDirect account. Then to go ManageDirect. Find the link for “Establish a Minor Linked Account” on the right.

The fill out the required information (name, Social Security Number, date of birth, etc.). The primary bank account linked to your account is automatically linked to this Minor Linked Account for your kid.

Repeat the above if you’d like to create a Minor Linked Account for another kid.

After the Minor Linked Account is created, you go into it by clicking on the “Access my Linked Accounts” link under ManageDirect.

Then you buy I Bonds as usual in each Minor Linked Account. The purchase limit is also $10,000 per kid per calendar year.

Cashing Out

When you cash out I Bonds from a Minor Linked Account for your kid, the money goes to the linked bank account. After that, you can transfer the money to a custodial account elsewhere for some other investments for your kid or spend the money on expenses that specifically benefit the kid.

Just like cashing out I Bonds in any other account, the accumulated interest is taxable to the kid in the year you cash out. TreasuryDirect will generate a 1099-INT form but it won’t send it by mail. You’ll have to remember to come into the Minor Linked Account and download or print the 1099 form. You use the 1099 form to file the tax return for your kid.

Reaching Adulthood

When your kid reaches 18, they can set up their own TreasuryDirect account as an adult. You “de-link” in ManageDirect and transfer the bonds in the Minor Linked Account to their adult account. They’ll take over from there.

Only moving the bonds from the Minor Linked Account to their adult account in TreasuryDirect doesn’t trigger taxes. Cashing out does.

***

Buying I Bonds in your kid’s name is relatively simple. The more important questions are:

Do you want to give money to your kid in the first place, as opposed to adding to their 529 plan or keeping full control of the money in your own name?How much of your kid’s money should you invest in I Bonds that match inflation as opposed to in mutual funds and ETFs for long-term growth?

Remember money in your kid’s name belongs to the kid.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How To Harvest Tax Loss Between an ETF and a Mutual Fund

Mutual funds are priced once a day after the markets close. The fund tallies up the value of all its holdings and calculates a Net Asset Value (NAV) per share. All the buy orders and sell orders the fund received before the markets closed on this day transact at this NAV. Everyone pays the same price on the same day but you don’t know what the price will be at the end of the day when you place your order.

ETFs are priced in the market throughout the day. Their prices change by the second. You see the price when you place your order but you don’t know whether this price is high or low relative to prices at a later time in the day or when the markets close.

In some ways, ETFs’ up-to-the-second pricing is an advantage. If the market is going up, there’s an opportunity to buy earlier in the day at a lower price. If the market is going down, there’s an opportunity to sell before it goes further down by the end of the day. You can also use limit orders to have your order execute only when the price meets a preset point, whereas mutual funds only accept market orders at the to-be-determined NAV.

However, the ever-changing prices can also be a hindrance. In general, you have to place your ETF orders when the market is open. Because you may be busy with work or other activities during those hours, you may prefer to put in your orders in the evening or on weekends. If you enter a market order for an ETF when the market is closed, your order will execute when the market first opens. Prices are sometimes volatile in the opening minutes and you may not get a fair price. If you enter a limit order for an ETF when the market is closed, your order may not be executed when the market moves away from the price you set in the limit order.

When you find time during trading hours to place an ETF order, you still can’t be sure how the price you see at that moment compares with the price of a mutual fund set after the end of the day. This comes into play when you harvest tax losses between an ETF and a mutual fund.

When you harvest tax losses, you sell one investment and you buy something similar. If you’re selling an ETF and buying a mutual fund, a big rally at the close will raise the price of the mutual fund, which makes you buy high and sell low. If you’re buying an ETF and selling a mutual fund, a large selloff at the close can also make you buy high and sell low.

Ideally you want to make your ETF order execute as close to 4:00 pm Eastern Time as possible in order to match the price movement in the mutual fund. It’s difficult when your schedule doesn’t allow it.

Market On Close Orders

The Market On Close (MOC) order type comes to the rescue.

A Market On Close order is a market order that’s executed at the closing price. It makes an ETF order behave like a mutual fund order. Instead of your order executing immediately (market order) or at a preset price (limit order), your Market On Close order will execute at the closing price, whatever it happens to be.

Most of the mainstream brokers for retail investors except Vanguard support Market On Close orders for ETFs. Here’s how to enter a Market On Close order with Fidelity:

Choose “Market” in the Order Type field and “On the Close” in the “Time in Force” field.

If your order entry screen looks like this, you’re on the Simplified Ticket. Click on the “View Expanded Ticket” link to open up more options.

Here are a few other things to keep in mind about Market On Close orders:

1. You can enter a Market On Close order only in whole shares. Fidelity supports trading fractional shares and trading in dollars but not for the Market On Close order type.

2. You can enter a Market On Close order only after the market opens and before a cutoff time prior to the close. Fidelity sets the cutoff at 3:40 pm Eastern Time, 20 minutes before the close. Charles Schwab has the cutoff at 3:45 pm Eastern Time.

3. A Market On Close order can’t be canceled after 3:58 pm Eastern Time.

If you prefer the simplicity of mutual funds, using Market On Close orders makes buying and selling ETFs close to the experience in buying and selling mutual funds. More importantly, when you harvest tax losses between an ETF and a mutual fund, using a Market On Close order makes both your ETF order and your mutual fund order execute at the closing price. This minimizes the price fluctuation between your orders.

It’s too bad Vanguard doesn’t support Market On Close orders. Consider using a different broker if you’d like to use Market On Close orders.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2022 Tax Brackets, Standard Deduction, and 0% Capital Gains

My previous post listed the 2022 retirement account contribution and income limits. The IRS will publish a separate notice shortly with the inflation-adjusted tax brackets and other income limits for 2022. I calculated some of the most commonly used numbers using the published inflation numbers and the same formula prescribed in the tax law. In general, the 2022 numbers will increase by 3.1% from 2021 before rounding.

These numbers don’t take into account the draft legislation currently being considered by Congress. Some of the numbers may change if laws change.

2022 Standard Deduction

About 90% of all taxpayers take the standard deduction. The standard deduction in 2022 is:

20212022Single or Married Filing Separately$12,550$12,950Head of Household$18,800$19,400Married Filing Jointly$25,100$25,900Standard Deduction

Source: IRS Rev. Proc. 2020-45, author’s own calculation.

People who are age 65+ or blind have a higher standard deduction than these.

2022 Tax Brackets

The tax brackets are based on taxable income, which is AGI minus various deductions.

SingleMarried Filing Jointly10%$0 – $10,275$0 – $20,55012%$10,275- $41,775$20,550 – $83,55022%$41,775 – $89,075$83,550 – $178,15024%$89,075 – $170,050$178,150 – $340,10032%$170,050 – $215,950$340,100 – $431,90035%$215,950 – $539,900$431,900 – $647,85037%> $539,900> $647,850Tax Brackets

Source: author’s own calculation.

2022 0% Capital Gains Tax

When your other taxable income plus your qualified dividends and long-term capital gains are below a cutoff, you will pay no federal income tax on your qualified dividends and long-term capital gains under this cutoff.

The cutoff is close to the top of the 12% tax bracket but they don’t line up exactly.

20212022Single$40,400$41,675Head of Household$54,100$55,800Married Filing Jointly$80,800$83,350Maximum Zero Rate Amount

Source: IRS Rev. Proc. 2020-45, author’s own calculation.

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2022 2023 Medicare Part B IRMAA Premium Brackets

[Updated on October 13, 2021, after the September inflation release. All numbers are final. My projections for 2021 matched the official numbers 100%.]

Seniors age 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.

Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.

The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount.

I haven’t seen any numbers that show how much collecting IRMAA really helps the government in the grand scheme. I’m guessing very little. One report said 7% of all Medicare beneficiaries pay IRMAA. Suppose the 7% pay double the standard premium, it changes the overall split between the beneficiaries and the government from 25:75 to 27:73. Big deal?

The income used to determine IRMAA is your AGI plus muni bond interest from two years ago. Your 2020 income determines your IRMAA in 2022. Your 2021 income determines your IRMAA in 2023. The untaxed Social Security benefits aren’t included in the income for determining IRMAA.

As if it’s not complicated enough for not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. The lines drawn for each bracket can cause a sudden jump in the premiums you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.

So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it a little harder.

2021 and 2022 IRMAA Brackets

The IRMAA income brackets (except the very last one) started adjusting for inflation in 2020. Here are the IRMAA income brackets for 2021 coverage and 2022 coverage. Before the government publishes the official numbers, I’m able to calculate based on the inflation numbers and the formula set by law. Remember the income on your 2020 tax return (AGI plus muni interest) determines the IRMAA you pay in 2022. The income on your 2021 tax return (to be filed in 2022) determines the IRMAA you pay in 2023.

Part B Premium2021 Coverage (2019 Income)2022 Coverage (2020 Income)StandardSingle: <= $88,000
Married Filing Jointly: <= $176,000Single: <= $91,000
Married Filing Jointly: <= $182,000Standard * 1.4Single: <= $111,000
Married Filing Jointly: <= $222,000Single: <= $114,000
Married Filing Jointly: <= $228,000Standard * 2.0Single: <= $138,000
Married Filing Jointly: <= $276,000Single: <= $142,000
Married Filing Jointly: <= $284,000Standard * 2.6Single: <= $165,000
Married Filing Jointly: <= $330,000Single: <= $170,000
Married Filing Jointly: <= $340,000Standard * 3.2Single: <= $500,000
Married Filing Jointly: <= $750,000Single: <= $500,000
Married Filing Jointly: <= $750,000Standard * 3.4Single: > $500,000
Married Filing Jointly: > $750,000Single: > $500,000
Married Filing Jointly: > $750,000

Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The surcharges are relatively smaller in dollars.

2023 IRMAA Brackets

It’s too early to know what the 2023 IRMAA brackets will be. Still, you can make reasonable estimates and give yourself some margin to stay clear of the cutoff points. If inflation is 0% through August 2022, these will be the 2023 numbers:

Part B Premium2022 Coverage (2020 Income)2023 Coverage (2021 Income), 0% InflationStandardSingle: <= $91,000
Married Filing Jointly: <= $182,000Single: <= $94,000
Married Filing Jointly: <= $188,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $118,000
Married Filing Jointly: <= $236,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $147,000
Married Filing Jointly: <= $294,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $176,000
Married Filing Jointly: <= $352,000Standard * 3.2Single: <= $500,000
Married Filing Jointly: <= $750,000Single: <= $500,000
Married Filing Jointly: <= $750,000Standard * 3.4Single: > $500,000
Married Filing Jointly: > $750,000Single: > $500,000
Married Filing Jointly: > $750,000

Because the formula compares the average of CPI numbers in a 12-month period over the average of CPI numbers in the previous 12-month period, even if inflation is 0% in the following months, the average will still be higher than the average in the previous months. If inflation is positive, the IRMAA brackets for 2023 may be higher than these. If inflation is negative, which is rare but still possible, the IRMAA brackets for 2023 may be lower than these.

The standard Medicare Part B premium is $148.50/month in 2021. A 40% surcharge on the Medicare Part B premium is about $700/year per person or about $1,400/year for a married couple both on Medicare. In the grand scheme, when a couple on Medicare has over $176k in income, they are probably already paying a large amount in taxes. Does making them pay another $1,400/year make that much difference? Nickel-and-diming just annoys people. People caught by surprise when their income crosses over to a higher bracket by just a small amount get mad at the government. Rolling it all into the income tax would be much more effective.

Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.

IRMAA Appeal

If your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA assessment. The “life-changing events” that make you eligible for an appeal include:

Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension income

You file an appeal by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.

Not Penalized For Life

If your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2022 2023 Medicare Part B Part D IRMAA Premium Brackets

[Updated on October 13, 2021, after the September inflation release. All numbers are final. My projections for 2021 matched the official numbers 100%.]

Seniors age 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.

Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.

The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount.

I haven’t seen any numbers that show how much collecting IRMAA really helps the government in the grand scheme. I’m guessing very little. One report said 7% of all Medicare beneficiaries pay IRMAA. Suppose the 7% pay double the standard premium, it changes the overall split between the beneficiaries and the government from 25:75 to 27:73. Big deal?

The income used to determine IRMAA is your AGI plus muni bond interest from two years ago. Your 2020 income determines your IRMAA in 2022. Your 2021 income determines your IRMAA in 2023. The untaxed Social Security benefits aren’t included in the income for determining IRMAA.

As if it’s not complicated enough for not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. The lines drawn for each bracket can cause a sudden jump in the premiums you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.

So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it a little harder.

2021 and 2022 IRMAA Brackets

The IRMAA income brackets (except the very last one) started adjusting for inflation in 2020. Here are the IRMAA income brackets for 2021 coverage and 2022 coverage. Before the government publishes the official numbers, I’m able to calculate based on the inflation numbers and the formula set by law. Remember the income on your 2020 tax return (AGI plus muni interest) determines the IRMAA you pay in 2022. The income on your 2021 tax return (to be filed in 2022) determines the IRMAA you pay in 2023.

Part B Premium2021 Coverage (2019 Income)2022 Coverage (2020 Income)StandardSingle: <= $88,000
Married Filing Jointly: <= $176,000Single: <= $91,000
Married Filing Jointly: <= $182,000Standard * 1.4Single: <= $111,000
Married Filing Jointly: <= $222,000Single: <= $114,000
Married Filing Jointly: <= $228,000Standard * 2.0Single: <= $138,000
Married Filing Jointly: <= $276,000Single: <= $142,000
Married Filing Jointly: <= $284,000Standard * 2.6Single: <= $165,000
Married Filing Jointly: <= $330,000Single: <= $170,000
Married Filing Jointly: <= $340,000Standard * 3.2Single: <= $500,000
Married Filing Jointly: <= $750,000Single: <= $500,000
Married Filing Jointly: <= $750,000Standard * 3.4Single: > $500,000
Married Filing Jointly: > $750,000Single: > $500,000
Married Filing Jointly: > $750,000

Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The surcharges are relatively smaller in dollars.

2023 IRMAA Brackets

It’s too early to know what the 2023 IRMAA brackets will be. Still, you can make reasonable estimates and give yourself some margin to stay clear of the cutoff points. If inflation is 0% through August 2022, these will be the 2023 numbers:

Part B Premium2022 Coverage (2020 Income)2023 Coverage (2021 Income), 0% InflationStandardSingle: <= $91,000
Married Filing Jointly: <= $182,000Single: <= $94,000
Married Filing Jointly: <= $188,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $118,000
Married Filing Jointly: <= $236,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $147,000
Married Filing Jointly: <= $294,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $176,000
Married Filing Jointly: <= $352,000Standard * 3.2Single: <= $500,000
Married Filing Jointly: <= $750,000Single: <= $500,000
Married Filing Jointly: <= $750,000Standard * 3.4Single: > $500,000
Married Filing Jointly: > $750,000Single: > $500,000
Married Filing Jointly: > $750,000

The standard Medicare Part B premium is $148.50/month in 2021. A 40% surcharge on the Medicare Part B premium is about $700/year per person or about $1,400/year for a married couple both on Medicare. In the grand scheme, when a couple on Medicare has over $176k in income, they are probably already paying a large amount in taxes. Does making them pay another $1,400/year make that much difference? Nickel-and-diming just annoys people. People caught by surprise when their income crosses over to a higher bracket by just a small amount get mad at the government. Rolling it all into the income tax would be much more effective.

Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.

IRMAA Appeal

If your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA assessment. The “life-changing events” that make you eligible for an appeal include:

Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension income

You file an appeal by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.

Not Penalized For Life

If your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How To Deposit Paper I Bonds to TreasuryDirect Online Account

I overpaid my taxes to buy an extra $5,000 worth of I Bonds. I received the paper I Bonds in the mail a week after I received the direct deposit for the remainder of my tax refund.

I can keep these paper bonds in a home safe or a safe deposit box at a bank but I much prefer to keep everything together in the online account at TreasuryDirect. In the usual government fashion, they don’t make it easy. Treat it as a test for how well you’re able to follow instructions. It feels convoluted the first time. It gets better after you get the hang of it.

Deposit = Conversion

First, the lingo. I think of it as depositing the paper bonds into the online account. The government calls it converting paper savings bonds to electronic form. When you deposit cash into your bank account, no one calls it converting paper currency to electronic form. You won’t find the instructions if you don’t know what it’s called.

You retain the original issue date when you deposit your paper bonds to the online account (“convert to electronic form”). You will earn the same amount of interest whether you keep the paper bonds as paper or add them to your online account.

Conversion Linked Account

Next, you can’t deposit directly into your online account. You have to create a special sub-account within your main account. They call it the “Conversion Linked Account.”

After you log in to TreasuryDirect, click on ManageDirect in the menu.

Then click on “Establish a Conversion Linked Account.”

This will create the sub-account. You only have to do this once. You can re-use this Conversion Linked Account in the future. You will see the linked account on the bottom left of the page when you log in to your main account. You go into the Conversion Linked Account by clicking on “My Converted Bonds.”

You do all the steps below in this Conversion Linked Account.

Registration List

After you get into the Conversion Linked Account, go to ManageDirect, and then click on “Create my registration list.”

A Registration means how the bonds are owned. You need to create a registration that matches the ownership printed on the paper bonds – just you, you and a second owner, or you with a beneficiary.

Our bonds had both our names. So I chose the “OR (co-owner)” option.

Again, you only have to do this once if your paper bonds from next year’s tax refund will have the same ownership.

Add to Cart

Now, back to ManageDirect. Click on “Convert my bonds.”

Enter each bond you’d like to deposit/convert. Make sure you enter the correct series, denomination, serial number, and issue date exactly as printed on the paper bonds. Leave the comments blank.

Create Manifest

After you’re done with entering all the bonds, go back to ManageDirect. Click on “View my cart.”

You will see a list of the bonds you just entered. Double-check to make sure everything is correct. Click on the “Create a Manifest” button at the bottom.

A manifest is like the packing list that comes with your package from online shopping. They want you to print the manifest, sign it, and mail it with your bonds.

Sign and Mail

The manifest has the Treasury Department’s mailing address in Minneapolis. Sign the manifest. Take pictures of your bonds before you mail them with the signed manifest.

Because the paper bonds came by regular mail to begin with, I only used plain First Class Mail when I mailed them back. You need two Forever stamps if you put 12 bonds in a regular #10 envelope because the weight is over one ounce. If you’d like to add tracking for your peace of mind, you can pay few dollars extra and mail it by Certified Mail. If you prefer FedEx or UPS, there’s a separate address on the manifest.

Case Number Assigned

You’ll receive an email when they receive your bonds and put the job in their work queue. I received the email seven days after I mailed the bonds. This email includes a case number in case you need to contact them. Just save the email.

Check Manifest

TreasuryDirect will work on your deposit/conversion but they won’t send another email when they’re done. Because you’ll retain the original issue date, and you’ll earn the same amount of interest regardless, I don’t worry how long it takes them to complete the process. It doesn’t make any difference whether it’s done in a week, a month, or three months.

If you’d like to check the progress, log in and click on “My Converted Bonds” at the bottom left to go into your Conversion Linked Account. Then go to ManageDirect, and click on “View my manifests.”

It’s close to completion when you see the status changing from blank to “In Progress.” It’s done when the value of your Conversion Linked Account goes up.

You don’t need to check the status every day. You can’t redeem the bonds in the first 12 months anyway. I checked periodically only for the purpose of writing this post. Here’s the complete timeline of my recent submission:

Day 1: Mailed the bonds by First Class Mail.Day 8: Received email with the case number.Day 26: Status of the manifest changed from blank to “In Progress.”Day 27: Conversion completed.

Set a reminder to check the status in 30 days. If it’s not done yet, check back in another 30 days.

Transfer to Main Account (Optional)

You can leave the converted bonds in the Conversion Linked Account, but I find it easier when the bonds are all together in my main account.

Go into the Conversion Linked Account and then go to ManageDirect. Click on “Transfer securities.”

Go into Series I savings bonds, and check the box for each bond you’d like to transfer. Even though the bonds are in electronic form now, they’re still separate individual bonds, not merged into one large bond.

Put in your Social Security Number and the account number of your main account.

Scroll down to the bottom and submit. It isn’t taxable when you transfer between your Conversion Linked Account and your main account.

Your Conversion Linked Account is empty again after you transfer the converted bonds to your main account. You will use the Conversion Linked Account when you get the paper bonds from your tax refund next year.

***

It feels quite convoluted when you do it the first time. After you get the hang of it, it comes down to:

Enter the serial numbers online. Print and sign a manifest (“packing list”). Mail it with the bonds to Minneapolis.Receive an email with a case number. Check back after 30 days. Check again in another 30 days if necessary.(Optional) Transfer the converted bonds from the special sub-account to the main account.Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How To Use Securities-Based Lending to Manage Cash Flow

Earlier this year, ProPublica did an exposé of how the ultra-rich pay relatively little income tax. One of their techniques is that they live on borrowed money. They don’t realize capital gains when they don’t sell their appreciated assets. No realized gains, no taxes. Meanwhile, their assets keep growing, and banks are increasingly comfortable lending them more money for their spending. Wall Street Journal called this strategy “Buy, Borrow, Die” (audio starts at 7:27).

We the small-time investors can do it too through the same mechanism. We can’t live on borrowed money for the rest of our lives but we can use borrowed money for a short while when we use securities-based lending.

What Is Securities-Based Lending?

When you use securities-based lending you borrow money using your securities (stocks, bonds, mutual funds, ETFs, …) as the collateral. In principle, it’s not that different than getting a HELOC using your home as the collateral.

Because your securities are much more liquid and easier to value than your home, you can get the loan much faster and at a lower interest rate than from a HELOC. You don’t need to prove your income. The current interest rate can be a little over 1%, whereas the rate on a HELOC is usually close to the prime rate, which is 3.25% today.

When Do You Need Securities-Based Lending?

People pride themselves on having no debt, but using borrowed money can be better than using your own money in many scenarios. Here are a few examples:

Make Illiquid Investment with Confidence

You have some cash and you’re ready to buy I Bonds for the great interest rate, but you’re concerned about the 12-month lockup. There’s absolutely no way to sell I Bonds in the first 12 months. What if you need the money during that time? Selling other investments triggers capital gains, throws you over income limits, and disqualifies you for this or that.

When you have a standby credit line available, you can go ahead and buy I Bonds with your cash. If nothing comes up in the first 12 months, your I Bonds are liquid now. In case you need the money, you tap the credit line until the lockup is over. You sell I Bonds to repay the loan. Your I Bonds will earn much more interest than the interest you pay on the loan.

Stop Parking Cash

People ask quite often “Where can I park a sum of cash for a year or two?” The answer is usually a savings account or a CD because the timeframe is too short. Both pay about 1% right now if you’re lucky.

When you have a standby credit line available, you can keep the money in your diversified portfolio. Chances are you will earn more than 1% in your portfolio by the time you need the money, but if it has a loss, you can tap the credit line. You pay off the loan when your portfolio recovers.

Bridge a Gap

You’re buying a home. Making your purchase offer contingent on selling your current home will make it unattractive to the seller in a competitive market. Selling your current home first and getting a rent-back makes you overbid to buy before the rent-back runs out. Renting after you sell means you have to move twice.

When you have a standby credit line available, you can tap it to buy the new home at your leisure. You move, sell your old home, and repay the loan. It’s worth paying some interest at a low rate to make it all smooth.

Lower Your Taxes

You want to sell some investments to help your daughter buy a home. Selling them all this year will trigger large capital gains but if you split the gains across two calendar years, each half of the gains will fall in the 0% tax bracket.

So you sell half and borrow half. Your daughter gets the home now. You sell the other half next January and repay the loan. The tax savings are much higher than the interest you pay.

Where Do You Get Securities-Based Lending?

You get it from the broker that holds your securities. If your current broker doesn’t offer it at an attractive interest rate, you have to be willing to move your account to one that does. Some banks also offer this type of lending through their private banking departments.

You can only borrow against your regular taxable brokerage account. IRAs and other tax-advantaged accounts can’t be pledged for loans but the broker may consider them in the overall relationship when they determine your interest rate.

Charles Schwab, TD Ameritrade (owned by Charles Schwab now), E*Trade, and Merrill Edge do it through their affiliated bank entity. Officially the affiliated bank is making the loan against your taxable brokerage account held at the broker. They all have different names for their programs:

Charles Schwab calls it Pledged Asset Line. TD Ameritrade calls it Collateral Lending Program. E*Trade calls it E*Trade Line of Credit. Merrill Edge calls it Loan Management Account.

Fidelity and Interactive Brokers lend directly as a margin loan.

The difference between a line of credit through an affiliated bank and a margin loan through a broker is that the bank loan can’t be used to purchase securities, pay down margin loans, or be deposited into a brokerage account, while the margin loan doesn’t have such restrictions. However, there’s no practical difference when you’re using the loan only for cash flow needs because you aren’t using it for those restricted purposes anyway.

The differences among the brokers come down to the interest rate and how much they let you borrow.

Interest Rate

Securities-based lending typically uses a variable rate tied to a short-term market rate plus a fixed markup. There’s usually no setup fee or maintenance fee to keep the credit line open and unused.

Interactive Brokers is known for their low margin rates. They post their rates transparently online. The rate is a blended rate based on how much you borrow. At the time I’m writing this, the rate under the IBKR Pro pricing plan starts at 1.58% on the first $100k and it goes down to 1.08% on the next $900k. Their convenient online calculator shows the blended rate for borrowing $500k is 1.18%.

A fintech startup M1 Finance offers a 2% margin rate in their M1 Plus program ($125 annual fee, free in the first year).

The officially posted interest rates at other brokers — Fidelity, Charles Schwab, TD Ameritrade, E*Trade, and Merrill Edge — are all much higher. However, if you have large accounts at one of these brokers, they’re often willing to offer you a special rate close to the margin rate at Interactive Brokers to keep your business. You should contact the rep assigned to your accounts or someone at their physical branch. I have read multiple reports of people getting offered a rate lower than 1.5% at these brokers.

Vanguard also offers margin loans but I haven’t heard anyone getting a similarly low rate from Vanguard.

If you can get a special rate at your current broker close to the rate offered by Interactive Brokers, you probably should stay. If you’re with Vanguard and you’re willing to move, you can shop among those other brokers and see who offers you the lowest rate.

Interactive Brokers is quite different than other brokers. Because they started from serving institutional customers, even though they also serve retail customers now, they expect you to know what you’re doing. Many things you take for granted at other brokers are either not available or difficult to figure out. It isn’t for the faint of heart. Use Interactive Brokers only when you want a low rate and you can’t get it anywhere else.

How Much Can You Borrow?

Each broker sets the rules. The amount you can borrow is only determined by the value of the securities in your account. There’s no debt-to-income requirement. It can be 50% or 70% of the value of your taxable account, but you probably shouldn’t borrow nearly as much anyway.

The Risks

The biggest risk in securities-based lending is that you borrowed too much and a market crash will trigger forced selling at the bottom of the market.

For example, the broker may require that 70% of your account value must be greater than your outstanding loan at all times. Suppose you had $100,000 in your account and you borrowed $50,000, and after the market drops your securities are worth only $70,000 now. 70% of $70,000 is $49,000, which is lower than your $50,000 loan outstanding. Now the broker can sell a part of your securities to pay down the loan, precisely when you don’t want to sell at the bottom of the market. The forced sale may trigger capital gains tax as well.

To guard against a 50% drop in the value of your securities, you probably shouldn’t borrow more than 30% of the account value. It helps if you have a balanced portfolio in your brokerage account that isn’t prone to a 50% drop to begin with. It also helps if you don’t carry the loan for a long period of time.

How Do You Draw From the Credit Line?

You may not be able to borrow right away after you sign up for the feature. Set up the account ahead of time and wait until you’re eligible.

Once the credit line is ready to use, you simply make a withdrawal to a linked bank account as needed. Or you can request a wire transfer. You pay interest only on the amount outstanding.

Is the Interest Tax-Deductible?

In general, no. Interest on personal loans isn’t tax-deductible. Even if you use the loan to buy a home, the interest is still not tax-deductible when the home isn’t used as collateral for the loan.

If you have a margin loan and you use it to buy additional securities, which isn’t what we’re talking about here, the interest is deductible up to your net investment income but only if you itemize deductions.

Do You Need to Make Payments?

You may need to make monthly interest-only payments when you have the loan through a bank affiliated with the broker. When you have a margin loan, the debit balance just compounds within your account. In either case, you can pay down the loan at any time.

***

Excessive borrowing is risky but borrowing prudently at a low rate can make many things a lot easier. If you have a large taxable account, learn from the ultra-rich and put it to good use. You end up saving money in many cases.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2021 2022 401k 403b 457 IRA FSA HSA Contribution Limits

[Updated on September 14, 2021, after the August inflation release. All IRA-related numbers are final.]

Retirement plan contribution limits are adjusted for inflation each year. Inflation has been at elevated levels in recent months. Most contribution limits and income limits will go up in 2022. Some limits will stay the same as in 2021 due to rounding.

Before the IRS publishes the official numbers in October or November, I’m able to make my own calculations using the published inflation numbers and going by the same rules the IRS uses as stipulated by law.

401k/403b/457/TSP Elective Deferral Limit

401k/403b/457/TSP contribution limit will go up by $1,000 from $19,500 in 2021 to $20,500 in 2022. This limit usually goes up by $500 at a time but higher inflation is making it go two steps in one year.

If you are age 50 or over, the catch-up contribution limit will stay the same at $6,500 in 2022 as in 2021.

Employer match or profit-sharing contributions aren’t included in these limits. If you work for multiple employers in the same year or if your employer offers multiple plans, you have one single employee contribution limit for 401k, 403b, and TSP across all plans.

The 457 plan limit is separate from the 401k/403b/TSP limit. You can contribute the maximum to both a 401k/403b/TSP plan and a 457 plan.

Annual Additions Limit

The total employer plus employee contributions to all defined contribution plans by the same employer will increase by $3,000 from $58,000 in 2021 to $61,000 in 2022. This limit usually increases by $1,000 at a time but now it’s jumping three steps in one year.

The age-50-or-over catch-up contribution is separate from this limit. If you work for multiple employers in the same year, you have separate limits for each unrelated employer.

SEP-IRA Contribution Limit

The SEP-IRA contribution limit is always the same as the annual additions limit for a qualified plan. It will also increase by $3,000 from $58,000 in 2021 to $61,000 in 2022.

Because the SEP-IRA doesn’t allow employee contributions, unless your self-employment income is well above $200,000, you have a higher contribution limit if you use a solo 401k. See Solo 401k When You Have Self-Employment Income.

Annual Compensation Limit

The maximum annual compensation that can be considered for making contributions to a retirement plan is always 5x the annual additions limit. Therefore the annual compensation limit will increase by $15,000 from $290,000 in 2021 to $305,000 in 2022.

Highly Compensated Employee Threshold

If your employer limits your contribution because you are a Highly Compensated Employee (HCE), the minimum compensation will go up from $130,000 in 2021 to $135,000 in 2022.

SIMPLE 401k and SIMPLE IRA Contribution Limit

SIMPLE 401k and SIMPLE IRA plans have a lower limit than standard 401k plans. The contribution limit for SIMPLE 401k and SIMPLE IRA plans will go up from $13,500 in 2021 to $14,000 in 2022.

If you are age 50 or over, the catch-up contribution limit will stay the same at $3,000 in 2022 as in 2021.

Employer contributions aren’t included in these limits.

Traditional and Roth IRA Contribution Limit

The Traditional or Roth IRA contribution limit will stay the same at $6,000 in 2022 as in 2021. The age 50 catch-up limit is fixed by law at $1,000 in all years.

The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can contribute the respective maximum to both a 401k/403b/TSP/SIMPLE plan and a traditional or Roth IRA.

Deductible IRA Income Limit

The income limit for taking a full deduction for your contribution to a traditional IRA while participating in a workplace retirement will increase by $2,000 for singles, from $66,000 in 2021 to $68,000 in 2022. It will increase by $4,000 for married filing jointly, from $105,000 in 2021 to $109,000 in 2022. The deduction completely phases out when your income goes above $76,000 in 2021 and $78,000 in 2022 for singles; and for married filing jointly, $125,000 in 2021 and $129,000 in 2022.

The income limit for taking a full deduction for your contribution to a traditional IRA when you are not covered in a workplace retirement but your spouse is will go up by $6,000 for married filing jointly from $198,000 in 2021 to $204,000 in 2022. The deduction completely phases out when your joint income goes above $208,000 in 2021 and $214,000 in 2022.

Roth IRA Income Limit

The income limit for contributing the maximum to a Roth IRA will go up by $4,000 for singles from $125,000 in 2021 to $129,000 in 2022. It will go up by $6,000 for married filing jointly from $198,000 in 2021 to $204,000 in 2022.

You can’t contribute anything directly to a Roth IRA when your income goes above $140,000 in 2021 and $144,000 in 2022 for singles, and $208,000 in 2021 and $214,000 in 2022 for married filing jointly, up by $4,000 and $6,000 respectively in 2022. 2021 may be the last year you can do a backdoor Roth.

Healthcare Flexible Spending Account Contribution Limit

The Healthcare FSA contribution limit will go up by $100 from $2,750 per person in 2021 to $2,850 per person in 2022.

Health Savings Account Contribution Limit

The HSA contribution limit for single coverage will go up by $50 from $3,600 in 2021 to $3,650 in 2022. The HSA contribution limit for family coverage will go up from $7,200 in 2021 to $7,300 in 2022. These were announced previously in the spring. Please see HSA Contribution Limits.

Those who are 55 or older can contribute an additional $1,000. If you are married and both of you are 55 or older, each of you can contribute the additional $1,000, but to separate HSAs in each person’s name.

Saver’s Credit Income Limit

The income limits for receiving a Retirement Savings Contributions Credit (“Saver’s Credit”) will increase in 2022. For married filing jointly, it will be $39,500 in 2021 and $41,000 in 2022 (50% credit), $43,000 in 2021 and $44,000 in 2022 (20% credit), and $66,000 in 2021 and $68,000 in 2022 (10% credit).

The limits for singles will be at half of the limits for married filing jointly, at $19,750 in 2021 and $20,500 in 2022 (50% credit), $21,500 in 2021 and $22,000 in 2022 (20% credit), and $33,000 in 2021 and $34,000 in 2022 (10% credit).

All Together 20212022IncreaseLimit on employee contributions to 401k, 403b, or 457 plan$19,500$20,500$1,000Limit on age 50+ catchup contributions to 401k, 403b, or 457 plan$6,500$6,500NoneSIMPLE 401k or SIMPLE IRA contributions limit$13,500$14,000$500SIMPLE 401k or SIMPLE IRA age 50+ catchup contributions limit$3,000$3,000NoneHighly Compensated Employee definition$130,000$135,000$5,000Maximum annual additions to all defined contribution plans by the same employer$58,000$61,000$3,000SEP-IRA contribution limit$58,000$61,000$3,000Traditional and Roth IRA contribution limit$6,000$6,000NoneTraditional and Roth IRA age 50+ catchup contribution limit$1,000$1,000NoneDeductible IRA income limit, single, active participant in workplace retirement plan$66,000 – $76,000$68,000 – $78,000$2,000Deductible IRA income limit, married, active participant in workplace retirement plan$105,000 – $125,000$109,000 – $129,000$4,000Deductible IRA income limit, married, spouse is active participant in workplace retirement plan$198,000 – $208,000$204,000 – $214,000$6,000Roth IRA income limit, single$125,000 – $140,000$129,000 – $144,000$4,000Roth IRA income limit, married filing jointly$198,000 – $208,000$204,000 – $214,000$6,000Healthcare FSA Contribution Limit$2,750$2,850$100HSA Contribution Limit, single coverage$3,600$3,650$50HSA Contribution Limit, family coverage$7,200$7,300$100HSA, age 55 catch-up$1,000$1,000NoneSaver’s Credit income limit, married filing jointly$39,500 (50%)
$43,000 (20%)
$66,000 (10%)$41,000 (50%)
$44,000 (20%)
$68,000 (10%)$1,500 (50%)
$1,000 (50%)
$2,000 (10%)Saver’s Credit income limit, single$19,750 (50%)
$21,500 (20%)
$33,000 (10%)$20,500 (50%)
$22,000 (20%)
$34,000 (10%)$750 (50%)
$500 (50%)
$1,000 (10%)

Source: IRS Notice 2020-79, author’s own calculations

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