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Want to lower your tax bill next year? Increase your contributions to 401 (k).

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 Want to lower your tax bill next year?  Increase your contributions to 401 (k).

Whether you get a refund or arrears this tax season, it’s never too early to start thinking about next year’s bill.

Increasing your 401 (k) contributions by 2022 can provide two benefits: a reduction in adjusted gross income, and a replenishment of your retirement savings.

What’s more, there is a higher employee deferral limit of 401 (k) for 2022, which offers more write-offs to set aside money for your golden years.

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Employees can transfer $ 20,500 to plans 401 (k), 403 (b) and similar plans for 2022 compared to $ 19,500 in 2021, thanks cost of living adjustments from the IRSand investors 50 and older can add $ 6,500 in catch-up contributions.

“You’re smart to jump on that,” said certified financial planner Catherine Valegha, a Green Bee Advisory welfare consultant in Winchester, Massachusetts. “Most people are set up [401(k) contributions] once and never look back. ”

If you seek to increase your contribution to 401 (k) in 2022, it may pay off if you start earlier, as the distribution may be more manageable than an increase at the end of the year.

The sooner you can increase your contributions, the faster your money will work for you.

Marguerite Cheng

CEO and co-founder of Blue Ocean Global Wealth

And more time in the market can offer greater growth potential, said Washington-based CFP Marguerite Cheng, CEO and co-founder of Blue Ocean Global Wealth in Geiserburg, Maryland, and a member CNBC Advisory Board.

“The sooner you can increase your contributions, the sooner you can make your money work for you,” she said.

Maximum earn 401 (k).

Higher-wage earners may also consider contributing 401 (k) contributions to reach the deferral limit until the end of the year.

For example, if you receive a bonus for October, you can pre-load 401 (k) contributions to maximize the plan, freeing up more earnings for November and December.

However, before you implement the plan early, you need to know how your 401 (k) match works, Valega said. Many companies only push the appropriate funds when you set aside part of your salary.

In this case, you will not receive the full amount from the employer if you do not make contributions of 401 (k) each payment period.

However, other plans have what is known as “true,” meaning the company calculates a 401 (k) match on an annual basis rather than each payout period.

“It means they don’t care if you invest,” Valegha said. “They’ll make sure you get a full match at the end of the year.”

You can learn more about your match by checking the summary description of Plan 401 (k), which covers the work of the account, or by reviewing a document with a financial advisor.

Cons of maximum use 401 (k)

While the maximum contribution of 401 (k) is a high goal, there are reasons why you may decide to limit deferrals after getting a full match of the company.

“This, of course, can vary depending on your goals,” said Marianella Calada, CFP and CPA at Tobias Financial Advisors in Plantation, Florida.

For example, if you save on a down payment for a home, you may decide to redirect funds to achieve your short-term goal, she said.

Similarly, if you are in credit card debt with high interest rates or do not have an emergency fund, you can distribute the money elsewhere before increasing the deferral by 401 (k).

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