The IRS announced new retirement plan contribution limits increases for 2025, allowing individuals to save more for retirement. These changes are hopeful to stave off the crushing impacts of inflation while improving retirement savings.
401(k) Changes
A 401(k), and their nonprofit and government entity counterparts, is a retirement savings plan provided by employers, allowing employees to contribute pre-tax income directly from their paycheck. The funds grow tax-deferred, with taxes paid upon withdrawal in retirement. Employers often match contributions up to a certain amount, helping to increase savings. There are two types: Traditional, which reduces taxable income now, and Roth, which uses after-tax income but allows for tax-free withdrawals later. Early withdrawals may incur penalties and taxes. Key updates to the 401(k) and similar nonprofit and government plans include:
401(k) Contribution Limits: The maximum contribution for employees participating in 401(k), 403(b), governmental 457 plans, and the Thrift Savings Plan will increase to $23,500, up from $23,000 in 2024.
Catch-Up Contributions for 401(k): For employees aged 50 and older, the catch-up limit is set at $7,500, allowing a total contribution of up to $31,000. For employees aged 60-63, the SECURE 2.0 Act permits a higher catch-up contribution of $11,250 for 2025.
IRA Changes
An Individual Retirement Account (IRA) is a personal savings plan that offers tax advantages for retirement savings. Contributions to a Traditional IRA may be tax-deductible, and earnings grow tax-deferred until withdrawal, at which point they’re taxed as income. Roth IRA contributions are made with after-tax income, allowing for tax-free withdrawals in retirement. Both types have annual contribution limits and offer a variety of investment options, from stocks to bonds. Early withdrawals may result in penalties and taxes, though Roth IRAs provide more flexibility for accessing contributions.
IRA Contributions: The annual IRA contribution limit remains at $7,000, with a catch-up contribution of $1,000 for individuals aged 50 and older, as outlined by the SECURE 2.0 Act.
IRA Deductibility Phase-Outs:
- Single Taxpayers with Workplace Retirement Plans: The deduction phase-out range increases to $79,000–$89,000.
- Married Couples Filing Jointly: If the contributing spouse has a workplace retirement plan, the phase-out range rises to $126,000–$146,000.
- Non-Covered IRA Contributors Married to a Covered Spouse: The phase-out range adjusts to $236,000–$246,000.
- Married Filing Separately: Phase-out remains unchanged at $0–$10,000
Roth IRA Income Limits:
- Single and Head of Household: The phase-out range moves to $150,000–$165,000.
- Married Filing Jointly: The range increases to $236,000–$246,000.
Retirement Savings Contributions Credit (Saver’s Credit)
The Retirement Savings Contributions Credit, or Saver’s Credit, is a tax credit for low- to moderate-income individuals who contribute to a retirement plan, like a 401(k) or IRA. Depending on income and filing status, it can be worth up to 50% of contributions, up to $2,000 ($4,000 if married filing jointly). It reduces the actual tax owed, helping eligible savers boost their retirement savings while lowering their tax bill. To qualify, participants must be 18 or older, not a full-time student, and not claimed as a dependent on someone else’s tax return.
Saver’s Credit Income Limits:
- Married Filing Jointly: Up to $79,000, increased from $76,500.
- Head of Household: Up to $59,250, up from $57,375.
- Single and Married Filing Separately: Up to $39,500, up from $38,250
SIMPLE Retirement Accounts
These type of accounts have two types of accounts, one is a SIMPLE IRA and the other a SIMPLE 401(k). Both are plans retirement savings options designed for small businesses with 100 or fewer employees. Both plans offer tax advantages, encouraging retirement savings. The key differences lie in contribution limits, administrative requirements, and withdrawal options, with SIMPLE 401(k) plans providing more features at the cost of increased compliance.
SIMPLE Retirement Accounts:
The contribution limit for SIMPLE accounts increases to $16,500. Certain SIMPLE plans allow a higher contribution of $17,600. The general catch-up limit for employees aged 50+ remains at $3,500, with specific SIMPLE accounts allowing $3,850. Employees aged 60-63 can contribute a catch-up limit of $5,250.
These adjustments reflect cost-of-living increases, aimed at enabling Americans to boost retirement savings. Full details are available in IRS Notice 2024-80 on IRS.gov. To find out more about the various retirement plans allowed by the IRS, visit our Personal Finance Basics page.