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March 2, 2022
In today’s post, we will be talking about some approaching deadlines for those who want to make a contribution to their IRA, HSA, ESA, or 401K for tax year 2021.
With most plans, you have until the tax filing deadline to make a contribution for whichever tax year you plan on filing.
Across the board, the usual deadline to file taxes is April 15th. Keep in mind, the government might extend, or push back, that deadline by a day or two, if it falls on a holiday or a weekend.
Generally speaking, that date is when you will have the opportunity to contribute to an IRA HSA, ESA, or 401K of the tax year that you’re filing for. So for example, we’re currently in the year 2022, and by April 15th, 2022, everybody will have filed their taxes for tax year 2021. You can make a contribution for tax year 2021, as long as you make that contribution by the tax filing deadline: this upcoming April 15th.
Now, in regards to employer plans for self-employed people like a SEP IRA, simple IRA, or solo 401K, you might be filing for a tax filing extension. This would also extend the amount of time that you have to make a contribution to that type of IRA for the tax year that you intend to file.
So if you have a SEP IRA, you can make your contribution for 2021 all the way up until April 15th, 2022. But if you file for an extension that pushes the deadline all the way to, say, October, you would have until then, October of 2022, to also make your contribution for tax year 2021.
There are, of course, contribution limits for all these different types of accounts that NuView Trust Company offers. Let’s start with the personal plans simply because those contribution limits still have not changed.
Just like year 2021, the most that you can contribute in 2022 to a traditional or a Roth IRA (which fall under the category of personal plans) is $6000. And if you’re over the age of 50, you can contribute an additional $1,000 as well.
For Health Savings accounts, the contribution limit went up by $50 for the year 2022. This is if your health plan is a single coverage health plan, meaning it is just you and no family members on the health plan with you. Remember it also has to be a high deductible health plan. For these individual HSA plans, you can now contribute $3,650 per year.
If you have family health coverage in a high deductible family health plan, you can double the contribution that you would make if you were just the sole person on that health plan. So now you can contribute a total of $7,300 to your HSA for a family coverage, high deductible health plan.
There is one other very important thing to take into consideration about the HSA. If you’re looking to make that contribution for the HSA for tax year 2021 by the tax filing deadline in 2022, you must have had that high deductible health plan in place by December 1st, 2021.
In other words, the only way to make an HSA contribution for tax year 2021, with the tax filing completed before the deadline in 2022, that high deductible health plan and HSA must have been put in place before December 1st, 2021.
The contribution limits did not change for the ESA, or Education Savings Account. Typically, you would open this account if you have a small child or a niece or a nephew that you want to start saving for future education expenses, but you want to invest that account into alternatives. This maybe something cash flowing that can build that account relatively quickly.
An ESA is a use-now account. You can use it for preschool through college and even trade school for things like books, tuition, iPads, computers, and home internet. For this type of account, you can put in $2,000 per year per child.
Now let’s get into the employer plans. The contribution limits on these are vastly different from your personal plans and your specialty plans like the HSA and the ESA, because they’re for self-employed people. It allows them to put more money into an IRA so that they can generate a retirement account for themselves.
Under the umbrella of employer plans, we have our SEP IRA, Solo 401K, and simple IRA. We order them this way because the SEP IRA and the Solo 401K have contribution limits that are actually based on a percentage scale of the self-employed person’s earned income for the year, more specifically, their net income.
Starting with the SEP IRA, for example, someone can contribute up to 25% of W2 income, or typically 20% of 1099 income. 25% and 20% is all fine and good, but there is a total cap at $61,000. And this cap has actually increased from the 2021 limit of $58,000. So this year 2022, you can contribute an additional $3,000 to a SEP IRA. Just be aware that the SEP IRA also does not have catch up contributions like other plans (traditional and Roth IRAs).
However, we do have a solo 401K, which is primarily for self-employed people with no employees. This plan does, in fact, have a catch up contribution. So for a solo 401K the catchup contribution is $6,500, and that can be made as an additional contribution if you’re over the age of 50.
The 401K works very similarly to the SEP IRA in the sense that a self-employed person – in this case with no common law employees – can contribute up to 25% of their self-employed net income for the year, or typically 20% of 1099 income.
Now, with the 401K, you might have the ability to make contributions as the employee separate from the employer contributions. This is particular to the solo 401K at NuView, just because the self-employed person is wearing two hats; they wear the hat as the employer and as the employee.
That means that if the self-employed person elects for this to be a feature of the 401K plan – specifically the solo 401K plan that NuView offers – they can actually make Roth contributions under their employee bucket of money in that 401K plan.
The way that works is, under the employee hat for that contribution, the self-employed person can contribute up to $20,500, which could all be Roth money as well. So now that portion of that solo 401K plan not only has tax deferred growth, but because it’s a Roth bucket of money, it’s going to have tax free distributions when the person comes of age at retirement and they’ve had the account for a certain period of time as well. That’s what qualifies the self-employed person to be able to take tax free distributions from that solo 401K.
As the employee, that $20,500 (which was an increase of $1,000 from the 2021 contribution limit of 19,500) can all be made as Roth contributions. But then we’ve also got the rest of that 25% of the earned income, or 20% of 1099 income that the self-employed person can contribute on the employer side.
They wear both hats; they can make contributions as an employee and as an employer. Meaning: if that person had maxed out that $20,500 cap on the employee side, now on the employer side they can make up the difference between that $20,500 and the total of 25% of W2 income or 20% of 1099 income.
This is why they’ll fill in the gap with that employer-side contribution. And just like the SEP IRA, there is going to be a maximum cap at $61,000.
A solo 401K actually does have a catch up contribution as well, if you’re over the age of 50 – the SEP IRA doesn’t have that feature. So, if you’re over the age of 50, you can contribute an additional $6,500 to that solo 401K plan.
The simple IRA, our last employer plan back in 2021, had a contribution limit of $13,500. In the year 2022, however, that has increased by $500. And now if you have a simple IRA, you can contribute a maximum of $14,000 for the year.
Now with the simple IRA – unlike the SEP IRA and similar to the solo 401K – you can make a catch up contribution. If you’re over the age of 50, this is an additional $3,000 that you can contribute on top of the BASE $14,000 that you can contribute to a simple IRA.
Another unique quality about the simple IRA is that there is no income limitation. So you won’t be limited to just 25% of your self-employed earned income or just 20% of your 1099 income.
As long as you have that $14,000 as earned income, the contribution is justified. For example, if you’re self-employed and you only make $5,000 of self-employed earned income during the year, you will be maxed out at $5,000 that you can contribute to a simple IRA. But if you make $15,000, that’s $1,000 more than the contribution limit. So in this scenario, you can only contribute $14,000 to that simple IRA.
We’ve covered a lot in this article. What applies to you exactly, we don’t know yet, so give us a call! We’ll help you through the process, and get an idea of what accounts might be right for you, what you might be looking at as far as contribution limits, and what deadlines you’re looking at specifically.
If you need to make a contribution for tax year 2021, it’s very important that you at least get that account set up and have a consultation with one of the IRA specialists here at NuView. You can give us a call or send us an email, and we will be happy to discuss with you further.
If you have any questions of how these things relate to you and your income or your taxes specifically, we always recommend consulting with a tax professional for that.
If you have any questions about the topics we covered in this popst, contact us at NuView.
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