401(k) contribution limits for 2025 are setting a new precedent. If you are focused on saving for your future, understanding the new contribution changes is important for your budgeting plan for this year!
If you aren’t familiar with how this type of retirement planning works, let’s start with the basics. A 401(k) plan is a type of profit-sharing plan that is typically offered by employers to eligible employees. This type of plan helps employees plan for the future by setting aside a portion of their taxable income for retirement. With a 401(k), you can take advantage of tax benefits, employer matches, personalized investment options, and more.
Having a 401(k) plan is important because it ensures that you will have a steady form of income in retirement to maintain your lifestyle, cover any medical expenses that may arise in the future, and avoid financial stress as you age. With people living longer, it’s more important than ever to start saving early for retirement. You are here, doing research and thinking about 401(k) plans, that is a great start, but keep the momentum going and take action now.
What Are 401(k) Contribution Limits in 2025?
When an employee “contributes” a percent of pre-tax income into their 401(k) account it is referred to as a contribution. Your employer will automatically deduct your 401(k) contribution from your salary (e.g., through direct deposit), and depending on your policy, the employer will match the amount that you put in. You will be able to track it every pay period on your W2 Form. It should also include how much you have contributed for the year in the year-to-date category.
In general, it’s a good idea to contribute as much as you can – up to the yearly limit set by the IRS. The more you put into this account, the more you take advantage of any employer match since it’s essentially free money.
Contribution Limits in 2025
The annual contribution limit for employees who participate in a 401(k) plan is increased to $23,500 in 2025 for account holders under the age of 50. Participants who are 50 and older generally can contribute up to $31,000 each year if they have an eligible 401(k) plan starting in 2025.
Staying within the 401(k) contribution limits is essential for avoiding penalties, maintaining tax advantages, and maximizing your retirement savings. By contributing up to the limit, you get the most benefit from tax deferral or tax-free growth, but you also comply with IRS rules, allowing your savings to grow without complications or unnecessary setbacks.
Key Changes for Contributions in 2024 vs. 2025
Employee contribution limit increases by $500 from $23,000 in 2024 to $23,500 in 2025. Catch-up contributions for those 50 and older remain $7,500 with no change. Self-employed contribution limits will increase by $1,000, similar to the employee-employer combined limits.
The role of inflation and cost of living play a key role in determining any and all adjustments made by the IRS for 401(k) plans each year. The IRS reviews inflation data periodically in order to fairly adjust the contribution limits, which can help workers keep up with rising costs of living throughout the country. These annual adjustments ensure that the contribution limits remain in line with the current economic conditions in the United States.
For example, the IRS has increased the employee contribution limit by $500 in 2025 and raised the total contribution limit by $1,000, reflecting inflation and the need for higher savings in response to rising living expenses.
Tax Benefits and Employer Match
One of the biggest advantages of contributing to a 401(k) is the tax benefits you can receive. Your contributions are made with pre-tax dollars, which means the money is deducted from your paycheck before taxes are taken out. The contributions are automatically deducted from your paycheck, meaning it reduces your taxable income for the year. The money grows tax-deferred until it is withdrawn in retirement, meaning that you don’t pay taxes until you need to use the money later on. There are two types of 401(k) options that offer different tax advantages. That includes pre-tax and Roth contributions.
As mentioned above, pre-tax contributions are made with the employee’s income before taxes are deducted. The employee’s overall taxable income for the year is reduced and you don’t pay taxes on the contributions until you withdraw them in retirement.
On the other hand, Roth contributions are made with after-tax dollars, meaning you pay taxes upfront. However, qualified withdrawals from a Roth 401(k) are tax-free. Both types of accounts offer the benefits of tax-deferred growth, but the key difference lies in when you pay taxes: upfront for Roth contributions or later for pre-tax contributions. Choosing the right type depends on your current tax situation and future retirement plans.
Employer Matches
But the real MVP with 401(k)s is the employer match. As an incentive to keep or hire new employees, many employers offer to match a portion of the employee’s contribution through matching contributions or profit-sharing. Employer match is money that will grow over time in the account and is essentially free. As mentioned previously, the more you contribute (within the contribution limits), the more the business or your employer will contribute. That creates a powerful compounding effect on your retirement savings.
Match formulas can vary from company to company. But a common one is for employers to contribute $1 for every $1 an employee puts in, up to 3% of their salary. Some employers might have their own rules or limits on how much you can contribute to their specific 401(k) plan. By contributing to your 401(k) up to the limit and securing your employer’s full match, you’re effectively increasing your retirement savings while lowering your current tax burden.
Investment options
401(k) plans typically offer a range of investment options such as mutual funds, stocks, bonds, and target-date funds. This can be managed by the employee themselves depending on the plan specifics. They usually range from aggressive growth funds to conservative income funds. You can adjust your investing strategy from time to time, moving your money to more aggressive or more conservative choices.
Common Questions About 401(k) Contribution Limits
When it comes to contribution limits, many consumers have the same questions. Let’s get to the bottom of them!
Is There A Withdrawal Rule For A 401(K)?
Money in a 401(k) plan generally can’t be accessed without penalty until the account holder reaches age 59½. If you withdraw funds earlier, there is usually a 10% penalty along with income tax on the withdrawn amount.
Can You Exceed The Limit?
No, you cannot exceed the annual contribution limit for your 401(k). The IRS sets a maximum contribution limit each year. Contributing beyond that limit could result in penalties and tax implications.
What Happens If You Over-Contribute?
If you over-contribute to your 401(k) and exceed the annual contribution limit, the IRS imposes penalties and requires corrective action. The amount that exceeds the annual contribution limit is considered excess contributions. This excess will be included in your taxable income for the year, which means you’ll pay income tax on it.
Additional Retirement Savings Options
If you reach the 401(k) contribution limit, there are other retirement savings options to consider. Individual Retirement Accounts (IRAs) allow for additional tax-advantaged savings. Contribution limits set at $6,500 ($7,500 if you’re 50 or older) for 2025. IRAs offer two types: traditional (pre-tax) and Roth (after-tax), each with its own tax benefits. Another option is the Health Savings Account (HSA), which is primarily designed for medical expenses but offers significant tax advantages. Contributions to an HSA are tax-deductible, growth is tax-deferred, and qualified withdrawals are tax-free. These other two options can help further diversify your retirement savings strategy beyond the 401(k) plan.
Contribute to a 401(k) Plan Today!
The sooner you take action to review your 401(k) contributions, the better positioned you’ll be for a comfortable retirement. Consider taking a moment today to assess whether your employer offers a 401(k) option. If you already have a 401(k), make sure that you are contributing enough to meet your retirement goals. Consider meeting with a financial planner if you’re unsure of whether you’re on track for your retirement.
These limits are crucial for maximizing retirement savings and taking full advantage of tax benefits. Taking proactive steps today can significantly impact your financial security tomorrow—don’t wait until it’s too late to make the most of your retirement opportunities.
