Dreaming of Retirement? Consider Maxing Out Your 401(k) in 2025
About 70% of U.S. private-sector workers have the option to contribute to a retirement plan such as a 401(k), 403(b), or 457(b) plan provided by an employer. Unfortunately, many of them don’t take full advantage of this tax-friendly opportunity to save for the future.
The SECURE Act and SECURE 2.0 Act (federal legislation passed in 2019 and 2022, respectively) sought to improve Americans’ retirement security by expanding access to workplace retirement accounts and encouraging workers to save more. As a result, some older workers will be allowed to make bigger contributions to their retirement accounts in 2025.
That’s good news if you are one of the many Americans who have experienced bouts of unemployment, took time out of the workforce for caregiving, helped pay for pricey college educations for your children (or yourself), or faced other financial challenges that prevented you from saving consistently. You may have some catching up to do. Regardless of your age, the responsibility for saving enough and investing wisely for retirement is largely in your hands.
Starting strong
The funds invested in tax-deferred retirement accounts accumulate on a tax-deferred basis, which means you don’t have to pay any required taxes until you withdraw the money. Instead, all returns are reinvested so they can continue compounding through the years. This is the main reason why young workers can really benefit from saving as much as they can, as soon as they can.
Many companies will match part of employee 401(k) contributions, so it’s a good idea to save at least enough to receive full company matches and any available profit sharing (e.g. 5% to 6% of salary). But to set yourself up for a comfortable retirement, you might elect to automatically increase your contribution rate by 1% each year (if that option is available) until you reach your desired rate, such as 10% to 15%.
Saving to the max
If you have extra income to save, keep the 2025 contribution limits in mind. Employees can contribute up to $23,500 to 401(k), 403(b), and government 457(b) plans. Workers age 50 and older can add a $7,500 catch-up contribution. This brings the total to $31,000.
New rules take effect in 2025 for workers ages 60 to 63. This group can make a larger “super catch-up” contribution of $11,250. That raises the total possible contribution to $34,750. Eligibility depends on your age at year-end. You qualify if you turn 60, 61, 62, or 63 at any point during 2025. You do not qualify if you turn 64 during the year.
You may also want to check whether your employer’s plan allows after-tax contributions. Few plans offer this feature, especially at smaller companies. If your plan allows it, the opportunity can be valuable.
In 2025, the combined limit for salary deferrals (excluding catch-up contributions), employer contributions, and employee after-tax contributions is $70,000 or 100% of compensation, whichever is less. You generally must maximize salary deferrals before making after-tax contributions. For example, a 60-year-old employee who contributes $34,750 and receives $15,000 from an employer could potentially add $31,500 in after-tax contributions. That would result in total contributions of $81,250.
SIMPLE retirement plans, which smaller employers often offer, follow different rules and lower limits. In 2025, employees can contribute up to $16,500. Workers age 50 and older may add a $3,500 catch-up contribution. Employees ages 60 to 63 may contribute an additional $5,250 instead. Some SIMPLE plans allow higher limits.
The IRS adjusts all contribution and catch-up limits annually for inflation.
Choosing between traditional or Roth
Traditional, or pre-tax, contributions come out of your paycheck before taxes. This reduces your current taxable income. Withdrawals from these accounts are taxed as ordinary income. Roth contributions use after-tax dollars. They do not lower your current tax bill, but qualified withdrawals in the future are tax-free under current law.
A Roth withdrawal qualifies for tax-free treatment if you hold the account for at least five years and meet one of the following conditions. You must reach age 59½, become disabled, or die. Other limited exceptions may also apply.
Early withdrawals can trigger penalties. Withdrawals from pre-tax retirement accounts before age 59½ generally face a 10% penalty in addition to income taxes. Nonqualified Roth withdrawals may also face penalties. However, because you make Roth contributions with after-tax dollars, you may withdraw those contributions at any time without taxes or penalties.
When choosing between traditional and Roth contributions, consider the timing of tax benefits. Ask whether a tax break today offers more value than a tax break in retirement. If you expect to fall into a higher tax bracket later, Roth contributions may provide greater long-term benefits.
You should also consider required minimum distributions. Traditional retirement accounts generally require taxable RMDs starting at age 73 or 75, depending on your birth year. These withdrawals apply even if you do not need the income. Roth accounts do not require RMDs during your lifetime. This feature can support estate planning and provide more control over withdrawals. It may also help you manage taxes and avoid higher Medicare premiums.
Splitting contributions between traditional and Roth accounts can increase flexibility in retirement.
One additional rule may affect future planning. Beginning in 2026, catch-up contributions must be made as Roth contributions if your prior-year earnings exceed $145,000.
Important Disclosures
This material may address tax-related matters. It does not provide tax advice and cannot be used to avoid legal penalties. Each taxpayer should seek independent guidance from a qualified tax professional based on individual circumstances.
These materials are provided for general information and educational purposes only. They rely on publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Information may change at any time without notice.
Contact ETCPA today to learn ,Dreaming of Retirement? Consider Maxing Out Your 401(k) in 2025
📞 +1 718-261-9600
📧 [email protected]
📍 Forest Hills, NY (Corporate Office)