On Nov. 1, the IRS rolled out some updates to retirement plans, including 401(k)s, that kick in next year. If you have access to a 401(k), now's the time to roll up your sleeves and dive into the details to help you plan ahead.
Here's a look at two key 401(k) changes to keep on your radar as you plan for 2025. If you're close to retirement, one of these changes could be especially beneficial, depending on your financial situation.
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1. The standard 401(k) contribution limit is rising
Thanks to inflation-adjusted limits, you'll be able to contribute more to a 401(k) in 2025. But before we dive into the numbers, let's start with a quick refresher on the 401(k) and why your contributions are a big deal.
A 401(k) is an employer-sponsored account where you can stash part of each paycheck to beef up your retirement portfolio. The best part? Contributions to a traditional 401(k) can reduce your taxable income. So if you're making $100,000 and decide to funnel $20,000 into your 401(k), your taxable income drops to $80,000. That's less money going to Uncle Sam and more working toward your financial goals.
Some folks contribute just enough to grab the employer match, while others go all in to max out their 401(k) contributions. According to Vanguard's 2024 How America Saves report, about 14% of employees contributed the max to their 401(k) plans in 2023. If you're someone who likes to go big, you'll be happy to hear the IRS bumped up next year's contribution limit. For 2025, you can contribute up to $23,500. It might sound like a small increase from 2024's $23,000, but every dollar counts when it's compounding over time.
Keep in mind, if you're 50 or older, you can make a catch-up contribution. In 2025, this means you'll be able to tuck an additional $7,500 into your 401(k). Take a look at the employee elective deferral limits over the years to see how contribution limits have increased over time.
Data source: IRS.
2. Super catch-up contributions are coming
If you're near retirement age, you're probably already familiar with the regular catch-up contribution. It allows you to set aside more money in a 401(k) after you reach a certain age. For 2025, this means that instead of being capped at $23,500, you could contribute up to $31,000 to your 401(k) if it aligns with your financial plan.
But there's a twist coming in 2025. One of the biggest changes under SECURE 2.0 is an increased catch-up contribution limit beyond the regular amount. It applies specifically to individuals aged 60, 61, 62, and 63. Instead of the standard $7,500 catch-up limit, people in this age group will be able to contribute an additional $11,250. Combined with the regular $23,500 limit, this allows eligible employees to contribute up to $34,750 in 2025.
Fortunately, you still have a few weeks before the changes take effect. Consider doing the following:
- Review your 401(k) plan details: Take a close look at your plan to fully understand its pros and cons. If you're unsure about the new rules and how they might impact you, this is a great time to reach out to your human resources department at work.
- Keep tabs on your budget: If you're behind on retirement savings, you might want to revisit your income and expenses to see if you can make changes. The new contribution limits can supercharge your portfolio, especially if you're in your early 60s.
- Maximize employer contributions: It's fine if you don't max out your 401(k). All told, it's not the ideal strategy for everyone. However, it's wise to find out how much your employer contributes and what you need to put in to get the match. That's essentially free money toward your future.
Getting ready for 2025
If you're thinking about contributing to a 401(k) in 2025, start by reviewing your plan documents and getting a handle on the latest rules. Then, take a look at your finances to decide if contributing to a 401(k) fits your goals and how much you'd like to tuck away. The more you can plan now, the better shape you'll be in to give your retirement savings a boost in 2025.
