How Much Should You Contribute to a 401(k) in 2025?

If you’re planning your 2025 contributions to an employer-sponsored 401(k), get ready to set aside an additional $500.

The Internal Revenue Service increased the 401(k) contribution limit to $23,500, up from $23,000 in 2024. The new limit also applies to governmental 457 plans, 403(b)s and the federal government’s Thrift Savings Plan.

For workers age 50 and older, the catch-up contribution is $7,500, unchanged from 2024. That means older workers may contribute a total of $31,000 to a 401(k) in 2025.

With these limits in mind, here’s what investors should consider for the year ahead.

[READ: Your Guide to Retirement Planning.]

Max Out Your 401(k)

Contributing as much as possible to your account is wise, as it allows you to make the most of tax-advantaged retirement savings.

Additionally, this sets you up to take full advantage of the power of compounding.

If you’re early in your career or have financial challenges that get in the way of saving, your contribution may be smaller than the maximum amount allowed. “It’s OK if maxing out isn’t possible right now,” said Constance Craig-Mason, CEO of Concierge Financial Advisory in York, Pennsylvania, in an email.

She recommended starting with an amount that fits your budget, whether it’s as little as $50 or $100 a month. These small contributions will add up, she noted.

“The key is consistency. Contribute regularly and increase it when you can. The habit is just as important as the amount,” Craig-Mason said.

Adjust Your Contribution Amount

When your financial situation changes, you can always start contributing more.

“If you can’t save the max amount, don’t fret. Most employers allow you to change your contributions throughout the year,” said Evan Potash, wealth management advisor at TIAA in Newtown, Pennsylvania, in an email.

He suggested that savers increase their contribution gradually until they are comfortable with their net take-home pay.

“A great financial habit is to increase your retirement savings contribution each time you get a raise, allowing you to continue down the path toward maxing out your contribution over time,” Potash added.

[Related:How to Save in a 401(k) and IRA in the Same Year]

Reasons to Avoid Maxing Out

In some cases, 401(k) savers must consider future tax implications of required minimum distributions. Investors must make these withdrawals from qualified accounts by age 73.

“Many people max out their 401(k)s without understanding the future tax liability from RMDs,” Potash said. “It’s a fine balance between getting a tax break now versus paying later.”

For example, he said, investors may not want to contribute the maximum if the account balance is already so high that RMDs will put them in a higher tax bracket.

One way to address that is by rolling a traditional 401(k) into a Roth IRA after age 59 1/2. The account owner would owe taxes on the money rolled over, but future withdrawals would be tax-free.

“Many plans also offer Roth contributions, which allows for tax-free withdrawals in the future,” Potash said.

“Roth contributions are a way to still allow people to max out their retirement plan contributions without adding to the tax bomb that will go off down the road, especially since there are no RMDs on Roth contributions anymore,” he added.

Balancing Contributions With Other Priorities

For younger workers, financial goals such as paying down debt or building an emergency fund may cut into money available for retirement savings.

How should savers allocate to their 401(k) while addressing other financial priorities?

“There is no one-answer-fits-all to this question,” said Lisa Hojnacki, participant services coordinator for the retirement plan division at Greenleaf Trust in Kalamazoo, Michigan, in an email.

“In general, if you have accrued high-interest debt or loans, it is likely the interest rate is greater than the rate of return on your investments, and you could lose money if you choose to invest instead of paying down debt,” she said.

Conversely, she said, for investors with low-interest debt, a good strategy may be to contribute as much as possible to a 401(k) while simultaneously chipping away at debt.

“Building an emergency fund equivalent to three to six months of your current income is recommended as a high-priority financial goal,” Hojnacki said.

However, she added, that doesn’t mean building an emergency fund should be prioritized over contributing to a 401(k); they should be done in tandem.

“Far too often, we see 401(k) participants drawing from their 401(k) early for a financial hardship because they don’t have any emergency savings,” she said.

That can cause a significant setback when it comes to retirement goals.

[READ: How to Build a Balanced Retirement Portfolio]

Don’t Miss the Employer Match

One attractive feature of many 401(k) plans is the employer match.

Often, a company contributes to an employee’s retirement account, typically based on a percentage of the employee’s contributions.

For example, it’s common for an employer to match 50% of an employee’s contributions up to 6% of their salary. This means if the employee contributes 6%, the employer adds 3%.

“Contributing enough to get the employer match effectively increases your compensation and speeds up your savings for retirement,” said Chad Gammon, owner of Custom Fit Financial in Cedar Rapids, Iowa, in an email.

Workers contributing to a 401(k) with a match must be aware of vesting schedules. These determine when employees fully own employer-matched contributions. Vesting can be immediate or phased, often occurring over three to six years.

“If you think you might not stay at your current company for long, you might want to check out vesting schedules for the match,” Gammon said. “It could take several years to get the full match and might not be worth it if you do not plan to stay at your company for at least two years.”

More from U.S. News

Can I Retire at Age 70 With $500K Saved?

10 Strategies to Maximize Social Security

Should You Spend Your Nest Egg or Leave a Legacy?

How Much Should You Contribute to a 401(k) in 2025? originally appeared on usnews.com

Update 11/11/24: This story was previously published at an earlier date and has been updated with new information.

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