
By Tim Schmidt - UPDATED: February 8, 2025
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401k plans are a popular way to save for retirement. By allowing employers to contribute to your savings, you can watch your investment grow faster. This type of account also offers tax benefits, allowing you to save using pre-tax dollars and reducing your taxable income, thanks to elective deferrals.
However, it's important to remember that there is a limit on the amount that you can contribute. Having a good understanding of the applicable restrictions can help you avoid penalties and plan for your retirement.
In this article, we will provide an overview of 2025 401k contribution limits.
Why a Contribution Limit?
At this point, you might be wondering why the Internal Revenue Service (IRS) places a restriction on the amount that employees and employers may contribute to a 401k plan.
It's important to remember that these retirement savings accounts are designed to offer tax benefits. Instead of paying tax before making a contribution, investors can pay with before-tax dollars and allow the money to accrue with a Traditional 401k retirement plan. When they reach retirement age, they will then pay tax on their withdrawals.
This also reduces the amount of income tax that a person will pay, depending on their filing status and income, which means that the federal government will receive less tax revenue throughout the taxpayer's working life. And, since the country relies on this money to function, excessive contributions could have a negative effect.
Unless limitations are implemented, more investors will move large sums of money into their 401k accounts to avoid taxation.
401(k) Contribution Limitations for 2025
Each year, these contribution limits are reviewed and changed. Let's take a look at the restrictions placed on 401k plans this year.
Employee Contributions
These contributions are paid by the worker or investor. It excludes the amount offered by their employer. In 2024, employee contributions could not exceed $23,000, but in 2025, this has been increased to $23,500.
Combined Employee and Employer Contributions
Unlike many other types of retirement savings plans, 401k accounts allow organizations to offer retirement savings benefits to their workers. To limit the overall amount transferred to a 401k plan, restrictions are placed on the collective contributions that both employers and employees can make.
In 2024, the collective amount that both parties could make toward this savings account within a tax year was capped at $69,000. However, this has been increased to $70,000 in 2025.
Catch-up Contribution Limit
While you are young, it's easy to remain within the employee contribution limit mentioned already. You will have many years to save for your retirement. However, when you are at the age of 50 or older, increasing your retirement savings becomes more important.
Fortunately, there is a higher contribution limit for those who want to make catch-up contributions. The IRS allows individuals aged 50 and above to save an additional $7,500 per annum. This means that their contributions are capped at $31,000 instead of $23,500.
Moreover, if you are 60 to 63 years of age, your contribution limit increases by $11,250 rather than $7,500. This is designed to allow you to grow your investment more quickly in preparation for your retirement.
Final Thoughts
If you have reached your contribution limit for this year, don't be dismayed. You can still give your retirement savings a boost by setting up a different type of investment, such as a Gold IRA, to diversify your portfolio. For more information on how to do this, please browse our website!
Frequently Asked Questions
1. Should I invest in a Roth IRA or 401(k) plan?
Ultimately, this will depend on your unique goals and preferences. We recommend going for a Roth IRA if you prefer tax-free withdrawals in retirement and more investment options. On the other hand, you should consider a 401k savings plan if you have access to employer matches and want higher contribution limitations.
2. How does a Traditional IRA compare to a Traditional 401k account?
Both options allow you to enjoy tax-deferred growth, but a 401k plan allows employer contributions and lets you contribute more toward your retirement savings. However, it does not offer as many investment options.
3. What is the allowed catch-up amount for this calendar year?
Suppose you are 50 to 59 years old. In that case, you can contribute an additional $7,500 to your 401(k) savings plan. However, if you are 60 to 63, you can contribute up to $11,250.
4. Why is it important to know the contribution limitations for 2025?
You must pay attention to these limits because they help you avoid penalties and ensure that you remain within legal guidelines.
5. What happens if you exceed the limits on your 401k account?
If you contribute more than you are allowed to, you will have to remove the extra funds, or you risk facing a penalty. Failure to do so could result in your 401k investment being seen as an unqualified plan, affecting your ability to take advantage of tax benefits in the future.