As we ring in a New Year, many of us will use the calendar changing from 2024 to 2025 as a chance to examine our goals. For some, that may mean physical health, while for others, it might mean financial health, including how to navigate opportunities to contribute more to your employer retirement plans.
“2025 is an especially important year to pay close attention to, as certain legislation is going into effect while others are preparing to sunset,” said Brandy Marion, retirement plans education manager at BOK Financial®. “A lot of the changes to these retirement plan contribution guidelines are influenced by inflation, and in years where there is low inflation, the IRS may choose not to offer an adjustment at all.”
As of November, year-over-year inflation stood at 2.3%, according to the Personal Consumption Expenditures (PCE) price index; however, the Federal Reserve doesn’t expect to hit its inflation target of 2% until 2026.
Here’s what retirement savings plan changes are ahead:
The IRS recently announced 2025 changes to its annual contribution limits for employees who have access to 401(k), 403(b) and other tax-advantaged employer savings plans.
- The amount individuals can contribute will increase to $23,500–up from $23,000 in 2024.
- For participants who are aged 50 and older and have 401(k), 403(b), and most 457 plans, as well as the government’s Thrift Savings Plan, the catch-up contribution remains $7,500, so the maximum contribution has increased to $31,000.
Furthermore, the SECURE 2.0 Act, passed in 2022, enacted additional changes to contributions that go into effect in 2025, including:
- If you’re between the ages of 60 and 63 (by the end of the calendar year), you get a higher catch-up contribution of $11,250 instead of the $7,500. This means your max contribution can be $34,750.
For individuals with access to 401(k), 403(b), and other tax-advantaged employer savings plans, it's crucial to understand that contributions to these accounts are tax-deferred. This means you can deduct them from your taxable income in the year they are made, according to Marion. Additionally, any investment growth or earnings within the account can grow tax-deferred, meaning you won't have to pay ordinary income tax until you make withdrawals, ideally during retirement.
Moreover, if your employer offers a Roth 401(k) option, contributions to this account are made with after-tax dollars. While you won't get an immediate tax deduction, the significant advantage is that qualified withdrawals in retirement are tax-free, including both contributions and any investment earnings. This can be a beneficial strategy for those who anticipate being in a higher tax bracket in retirement.
“It’s also important to note that the combined contribution limit is much higher for 2025, rising to $77,500,” Marion said. This includes: pre-tax contribution, Roth contributions (up to $23,500), employer-matching contributions and after-tax contributions, if you’re ineligible for a catch-up contribution.
Investing for the future
If you’re not already contributing to a 401(k), now is the time to take advantage of the long-term benefits of these savings programs, Marion said. “Even if you’re not maximizing your contributions, if your employer offers to match a percentage, you should contribute enough to earn the match. By not taking advantage of this benefit, you are missing out on ‘free money.’”
Increasing your pre-tax 401(k) contributions will also reduce your taxable income, which means that the more your contributions increase, the less you’re taxed on the remainder. For example, if your pre-tax paycheck is $2,000 and you allocate 10% to your 401(k), you’ll only be taxed on $1,800. Even a 1% increase in your contribution rate can make a difference in the long run, according to Marion.
All in all, it’s good to review your 401(k) at regular intervals to ensure that you’re meeting your own progress toward your retirement goals.
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