Preparing for retirement is a vital financial priority, and a 401(k) plan is one of the best tools to help you reach that goal. If your employer offers a 401(k) or Roth 401(k), maximizing your contributions in 2025 is a wise strategy to grow your retirement savings.
If you are not currently contributing the maximum allowed, think about increasing your contributions in 2025. The power of tax-deferred growth (or tax-free growth with Roth accounts) means that even a small increase in contributions can significantly enhance your retirement fund over time.
A 401(k) works by allowing employees to defer a portion of their pay, which their employer contributes to the plan on their behalf. Contribution limits are adjusted annually for inflation, and in 2025, the limit has increased to $23,500 (up from $23,000 in 2024). Employees aged 50 or older by year-end can also make additional “catch-up” contributions of $7,500, unchanged from 2024. This means that individuals aged 50 or older can save up to $31,000 in 2025, up from $30,500 in 2024.
Starting in 2025, a new law allows even higher catch-up contributions for certain ages. Participants aged 60, 61, 62, or 63 can contribute an additional $11,250 as a catch-up amount, enabling them to save even more during these critical pre-retirement years.
Note: The contribution amounts for 401(k)s also apply to 403(b)s and 457 plans.
Traditional 401(k)s
A traditional 401(k) offers many benefits, including:
- Pretax contributions, which reduce your modified adjusted gross income (MAGI) and can help you reduce or avoid exposure to the 3.8% net investment income tax.
- Plan assets that can grow tax-deferred — meaning you pay no income tax until you take distributions.
- The option for your employer to match some or all of your contributions pretax.
If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.
Roth 401(k)s
Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.
Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.
Planning for the future
Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.
We Can Help
If you have any questions about maximizing your retirement plan, or would like to discuss individual tax planning strategies that apply to your situation, do not hesitate to contact your Rudler, PSC advisor at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Alyssa Monson, Staff Accountant and James Ray, CPA.
If you would like to discuss your particular situation, contact Alyssa or James at 859-331-1717.
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