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Expanded 401(k) Contribution Limits for 2025: What Employees Need to Know
Starting in 2025, employees across the United States will have the opportunity to contribute more to their retirement savings. The IRS has increased the contribution limits for 401(k) and other retirement savings plans, aiming to help individuals meet their financial goals amid rising retirement needs. Here’s a breakdown of the key changes that employees and employers should be aware of in the upcoming year.
Increased Contribution Limit for 401(k) and Similar Plans
The IRS announced that beginning in 2025, employees can contribute up to $23,500 to their 401(k), 403(b), most 457 plans, and the Thrift Savings Plan (TSP) for federal employees. This is a $500 increase over the 2024 contribution limit of $23,000. Employees can take advantage of this higher limit to build a more substantial retirement nest egg.
Higher Catch-Up Contributions for Certain Age Groups
For employees aged 50 and older, the catch-up contribution limit will remain at $7,500 for 401(k), 403(b), most 457 plans, and the TSP, the same as in 2024. However, a new benefit will be available for employees aged 60 to 63, who can contribute up to $11,250 in catch-up contributions starting in 2025, rather than the standard $7,500. This provision allows individuals approaching retirement to save more during these critical years.
Expanded Employer and Employee Contribution Limits
The limit on combined employer-plus-employee contributions to defined contribution plans will also increase in 2025. Employees can now receive up to $70,000 in total contributions, a modest rise from the 2024 cap of $69,000. This allows employees to maximize their retirement savings with added support from employer contributions.
Catching Up on Contributions: A Mixed Reality
Despite the increases in contribution limits, the majority of employees don’t reach these caps. Data from Vanguard suggests that in 2023, only 14% of employees fully maxed out their 401(k) contributions. Rising retirement needs, however, are pushing individuals to consider higher savings. Recent findings from Northwestern Mutual revealed that the average “magic number” for retirement is now $1.46 million, up from $1.27 million last year and significantly higher than $951,000 in 2020.
Defined Benefit Plan Limits
Changes have also been made for defined benefit plans. The maximum annual benefit an employee can receive from a defined benefit plan will increase to $280,000 in 2025, up from $275,000 in 2024. For those who left their jobs before January 1, 2025, benefit limits will be adjusted based on their previous compensation, using a factor of 1.0262, per IRS guidelines.
IRA Contribution and Deduction Changes
IRA contributions will remain capped at $7,000 for 2025, with an additional $1,000 catch-up allowance for individuals aged 50 and older. The phase-out ranges for traditional IRA contribution deductions and Roth IRA contributions will see modest increases, providing some additional flexibility for retirement savings:
For single taxpayers in a workplace retirement plan, traditional IRA deduction phase-outs will apply between $79,000 and $89,000.
For married couples filing jointly, the range will rise to $126,000–$146,000.
Roth IRA phase-out income ranges will adjust to $150,000–$165,000 for single taxpayers and $236,000–$246,000 for married couples.
Saver’s Credit Adjustments for Low- and Moderate-Income Workers
The Saver’s Credit, designed to encourage retirement savings among low- and moderate-income individuals, will see adjusted income thresholds in 2025. The income limits for eligibility will increase to $39,500 for individuals, $79,000 for married couples filing jointly, and $59,250 for heads of household. This adjustment aims to broaden access to retirement incentives for those with lower earnings.
Communication Is Key for Employers
While many organizations have already set their benefits for the upcoming year, employers should make an effort to inform employees about these changes now and continue to communicate the options throughout 2025. Employees typically have the flexibility to adjust their retirement contribution rates year-round, though some employers may impose limits on the frequency of these changes.
These expanded limits and incentives reflect growing recognition of the importance of retirement readiness, as well as a response to the evolving financial needs of the U.S. workforce. By staying informed and maximizing new opportunities, employees can work toward a more secure retirement.
Top Roth IRAs to Invest in
For those looking to boost their retirement savings, exploring Roth IRAs can be a smart complement to your 401(k) contributions. Here are some of our top IRAs.
Perfect for beginners, this IRA can be great for people who enjoy the DIY approach. It offers a Self-Directed Trading option to get started.
There is no account minimum or monthly maintenance fees. This commission free IRA offers a mix of stocks, bonds, options, and ETFs, but expect to pay a $0.50 per contract fee for options. Also, beware that there is a $50 full/partial outgoing transfer fee but no annual charges or inactivity fee.
Those who do not wish to invest can still benefit from its excellent 4.25% savings rate on uninvested cash.
This IRA allows investors to make after-tax contributions, trade a variety of assets, including stocks, ETFs, and futures, mutual funds, while also enjoying no taxes on qualified withdrawals.
There are no account minimums or monthly service charges but there is a $0.65 per contract fee for options. On the downside, the interest rate on uninvested cash is very low at just 0.45%.
You can get started with just your SSN, and employer’s name and address.
This robo-advisor offers automated index investing so you can be totally hands-off. However, it has some cons when compared to the two options discussed above.
There is an account minimum of $500 for automated investment accounts. It goes down to $1 for cash accounts and the stock investing account.
ETF expense ratios average 0.08%. Portfolios that include the Wealthfront Risk Parity Fund have an average expense ratio of 0.11%.
Also, you will pay a 0.25% fee for automated investing. There is no management fee or commissions for the stock investing account.
Despite additional costs, we think Wealthfront can be a great option for “set-it-and-forget-it” investors.
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