Retirement savers contributing to a 401(k) plan can make larger contributions in 2025.
The Internal Revenue Service boosted the annual contribution limit for 401(k)s, 403(b)s, governmental 457 plans and the federal government’s Thrift Savings Plan to $23,500, up from $23,000 in 2024.
The catch-up contribution limit for employees age 50 and older remains $7,500 for 2025, for a total contribution of $31,000.
Under a change made in the SECURE 2.0 act, employees between the ages of 60 and 63 have a higher catch-up limit of $11,250.
“The recent increase in 401(k) contribution limits isn’t just an arbitrary change; it’s directly linked to inflation and the rising cost of living,” Said Israilov, a certified financial planner at Israilov Financial in San Francisco, said in an email.
“When prices climb like they have lately, the IRS raises these limits to help keep your retirement savings on track,” he added.
“These adjustments are based on changes in the consumer price index, making sure inflation doesn’t quietly erode your ability to save,” Israilov said. “It’s the government’s way of saying, ‘We understand. Things cost more, so here’s a little extra room to save.’ ”
[READ: What Retirement Savers Need to Know About the SECURE 2.0 Act in 2025]
Why You Should Max Out a 401(k)
It’s wise to contribute the maximum allowable amount to a 401(k) if you’re able to do so. If you can’t contribute the maximum amount allowed by the IRS, invest as much as possible.
“In a 401(k), your money has the potential to double every seven to 10 years, so even a small contribution can go a long way,” said Andrew Crowell, financial advisor and vice chairman at D.A. Davidson & Co. in Los Angeles.
Workers contributing to a 401(k) have the power of compound interest on their side, he added. The more time the funds have to compound, the better.
401(k) Contribution Strategies
If an employer offers both a Roth and traditional 401(k), plan participants have the option of splitting contributions between the two as long as total contributions don’t exceed the yearly limit.
“Many 401(k) plans offer the option to elect pretax, Roth or a combination of the two for contributions,” said Della Stegall, a certified financial planner at Fruit of the Vine Financial in New Braunfels, Texas, in an email.
This gives employees the flexibility to maximize tax benefits to suit their situation, she added. Lower-to-moderate income earners in a lower tax bracket may find it’s better to contribute to the Roth portion of their retirement plan.
“This way, their income would be taxed in the lower tax brackets now and not subject to unknown future tax rates, which could be higher,” Stegall said.
For higher-income earners who anticipate being in a lower tax bracket in retirement, contributing up to the maximum limit to the pretax portion of their retirement plan may be a sound strategy.
“This allows them to defer those taxes until later, when they would potentially be paying less in taxes,” Stegall said.
[How to Save in a 401(k) and IRA in the Same Year]
Pitfalls to Avoid
If retirement savers contribute more than IRS-specified limits, they may face penalties.
Contributing too much to a 401(k) triggers a 10% penalty on the excess amount if it’s not corrected by the tax deadline.
That excess amount is taxed twice: once when the contribution is made and again when it’s withdrawn.
To avoid this, monitor your contributions closely and adjust them as needed to stay within annual limits. Your employer may have a mechanism to prevent excess contributions.
“For those aiming to max out their 401(k) contribution and have a certain percentage of their salary deferred, check that the plan or payroll department has a system in place for avoiding over-contributing,” said Stegall.
“Going over the contribution limit can have adverse tax consequences and needs to be corrected promptly to avoid penalties,” she said.
[The 10 Biggest Regrets of Retirees]
Don’t Miss the Employer Match
If your employer offers a match on your 401(k) contributions and you don’t take advantage of it, you are essentially leaving money on the table. The more you contribute up to the allowable limit, the greater the potential for the match.
This can boost retirement funds significantly over time. In addition to the contributions, there’s more money in the account that can compound.
The new limits for 2025 present an opportunity to review other aspects of your 401(k) plan.
“When the limits increase, it’s a great time to reevaluate contribution amounts, investment selections and beneficiaries listed in your 401(k) to make sure they are up to date,” said Benjamin Simerly, CFP, founder and wealth advisor at Lakehouse Family Wealth in Concord, Ohio.
Changing beneficiaries can be important after a major life event such as a divorce.
“Nobody wants to leave their 401(k) to their ex-husband if they pass away unexpectedly,” Simerly said. “And when you make these updates, most Americans should aim to contribute at least as much as needed to get their full employer match amount.”
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New 401(k) Contribution Limits for 2025 originally appeared on usnews.com
Update 11/07/24: This story was published at an earlier date and has been updated with new information.
