You can contribute $1,000 more to your 401(k) in 2022 — here's why it's worth considering

A new year calls for new opportunities to up your retirement-saving game — and that may entail putting more money into your 401(k).

If you haven't already taken note of the IRS' cost-of-living adjusted contribution limits for workplace retirement plans, now may be the time as you plan for the future.

Retirement savers with a 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan can contribute up to $20,500 in 2022, a $1,000 increase from the $19,500 limit in 2021. This means you can set aside about an extra $83 per month into your 401(k) plan beginning in 2022. 401(k) savers ages 50 and older can make an annual catch-up contribution up to $6,500 in 2022 (no change from 2021), for a total contribution of $27,000.

If you can already afford to max out your 401(k) account, you should take advantage of the increased contribution limit in the new year and plan on saving an additional $1,000 to make your total contribution for the year $20,500.

It's sort of a no-brainer option, thanks to these tax breaks that come with 401(k) contributions:

1. Lower your taxable income even more

Contributions to your 401(k) come directly from your salary and are made with pre-tax dollars, lowering your taxable income. A larger contribution to your 401(k) can lower your taxable income even more.

If you contribute the extra $1,000 to your 401(k), your gross income will be lower for 2022. An income tax deduction wouldn't apply if you took that $1,000 and put it into something else, such as a savings account or brokerage account.

2. Grow more money tax-deferred

The additional $1,000 you put into you 401(k) will add to the amount of money you can grow tax-deferred. If you otherwise stashed this $1,000 into something like a taxable brokerage account, you would be responsible for paying taxes on your dividends (and gains if you sell your investments) come the end of the year.

"Funds put in the brokerage account would create capital gains taxes," Matt Rogers, a CFP and director of financial planning at Fidelity's eMoney Advisor, tells Select.

With a 401(k), as you likely know at this point, your earnings automatically roll back into your plan and compound interest goes to work. Retirement savers earn returns on their initial investment, plus their investment gains, which helps their savings grow exponentially over the long term.

Plus, Rogers argues that the extra $1,000 in retirement contributions is easy to save since it's automatically deducted from your paycheck over the year, meaning you wouldn't have to think about how you'd spend this chunk of money otherwise. "The extra savings is protected from human nature to 'spend it if you see it,'" he says.

Can't afford to max out your 401(k)? That's ok, but at least make sure you are contributing enough to meet any employer match. Otherwise, that's essentially free money left on the table.

If your job doesn't offer a 401(k) plan, making consistent IRA contributions is a good retirement goal for the new year. The IRA contribution limit has not changed, as individuals can still contribute up to $6,000 total between their traditional IRA and Roth IRA accounts. IRA savers ages 50 and older can make an annual catch-up contribution up to $1,000 in 2022 (no change from 2021), or $7,000 total.

If you don't yet have an IRA opened, consider doing so through brokerages like Charles Schwab, Fidelity Investments and Betterment (a top-rated robo-advisor). All three offer both traditional IRAs and Roth IRAs.

With traditional IRAs, you delay paying any taxes until you withdraw funds from your account later in retirement. With Roth IRAs, however, you pay taxes upfront by contributing after-tax dollars and later in retirement your withdrawals are tax-free (as long as your account has been open for at least five years).

Generally, traditional IRAs are most effective if you expect to be in a lower tax bracket when you retire, while Roth IRAs are best for those in a lower tax bracket today. The latter is most likely better for younger investors who are early on in their careers and thus planning to have more income (and a higher tax rate) when they retire.

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