Saving for retirement is one of the most important financial goals, and a 401(k) plan remains a powerful tool for achieving it. If your employer offers a 401(k) or Roth 401(k), increasing your contributions in 2025 could significantly strengthen your retirement savings.
Contribution Limits Are Increasing
In 2025, the maximum contribution limit for 401(k) plans will rise to $23,500, a $500 increase from 2024. Employees aged 50 and older can take advantage of an additional $7,500 in "catch-up" contributions, allowing them to save up to $31,000.
There’s also a notable change for individuals aged 60 to 63 in 2025. Under new regulations, these employees can make a catch-up contribution of $11,250, providing an opportunity to save even more during this critical period leading up to retirement.
Note: These contribution limits also apply to 403(b) and 457 plans.
Benefits of a Traditional 401(k)
A traditional 401(k) offers several advantages:
Pretax Contributions: Your contributions are deducted from your income before taxes, reducing your modified adjusted gross income (MAGI). This can help you lower your overall tax burden and potentially avoid the 3.8% net investment income tax.
Tax-Deferred Growth: Funds in your account grow tax-free until you withdraw them in retirement.
Employer Matching: Many employers match a portion of your contributions, which is essentially free money toward your retirement savings.
If you already have a traditional 401(k), consider increasing your contribution rate in 2025 to get as close as possible to the $23,500 limit (or higher if eligible for catch-up contributions). Remember, pretax contributions reduce your taxable income, which can soften the impact on your take-home pay.
Exploring the Roth 401(k) Option
If your employer offers a Roth 401(k), you can designate some or all of your contributions to this account. Unlike a traditional 401(k), Roth contributions are made with after-tax dollars and don’t lower your current MAGI. However, qualified distributions in retirement are completely tax-free.
A Roth 401(k) can be particularly beneficial for high earners who may not qualify to contribute to a Roth IRA due to income limits. By using a Roth 401(k), you can enjoy the benefits of tax-free withdrawals without income-based restrictions.
Start Planning Today
Maximizing your retirement contributions requires thoughtful planning. If you’re unsure how much to contribute or how to balance traditional and Roth 401(k) contributions, we’re here to help. Contact us to discuss your retirement goals and explore strategies tailored to your financial situation.