The IRS is raising 401(k) contribution limits for 2025 and adding a “super catch-up” option for people ages 60-63.

Saving for retirement? You can invest more money into your workplace plan next year. The IRS increased the 401(k) contribution limit to $23,500 in 2025 from $23,000 in 2024, according to Friday announcement.

The $500 increase also applies to other workplace retirement plans such as the 403(b) plan, 457 plan and Thrift Savings plan.

Each year, the IRS may make changes to contribution limits due to cost of living adjustments. The agency also announced a significant increase in supplemental contributions for workers ages 60 to 63.

Catch-up contributions

Catch-up contributions are aimed at helping employees approaching retirement age. They have set limits, but allow employees of a certain age to save even more than the traditional limit.

“The catch-up program is designed to allow older workers who were unable to save enough money in their younger years to save larger contributions now, thereby catching up,” said Lawrence Sprung, certified financial planner, founder of Mitlin Financial and author articles. from “Financial planning has become personal“

If you’re 50 or older, you can save an additional $7,500 in your 401(k), an amount that won’t change until 2025. In other words, savers with 50+ years of experience can max out their 401(k) by contributing up to $31,000 in 2025.

But thanks to the SECURE 2.0 Act, people ages 60 to 63 will have a higher co-contribution limit of $11,250 in 2025. 2025.

“Employees, especially if they are currently working at their maximum capacity or are turning 50, 60, 61, 62 or 63, should make sure they take advantage of the new limits available to them,” Sprung said. “They may want to update their contributions from 1 January 2025 to reflect the new increased limits. Waiting until later in 2025 may require the employee to contribute too much from each paycheck to reach the newly increased limit.”

The fight to max out your 401(k)

Despite higher contribution limits, only a small percentage of workers end up maxing out their 401(k) plan, leaving them vulnerable and exposed. few resources for retirement.

“Only about 14% of people max out their 401(k), and that’s the problem. If people are really paying attention, pensions will disappear and Social Security will be a big mess in about 10 years. And if people want to have a truly meaningful retirement, they better start saving,” said Steve Azuri, a certified financial advisor and company owner. Azuri Financial.

If you break down your monthly payments, to max out your 401(k) in 2025 and contribute $23,500, you’d need to save about $1,958 per month. For most people, this is a significant amount and could be equivalent to paying for housing.

For those with more discretionary income, contributing up to a cap can offer the greatest tax benefits while also putting them on the right path to saving.

Other countries with limited resources still have options.

What to do if you can’t reach the maximum

Depending on your income and expenses, contributions within your 401(k) plan may not be affordable. But that doesn’t mean you shouldn’t invest in your 401(k) or take advantage of employer-provided benefits—funds that are an integral part of your compensation package. Not taking advantage of the benefits epitomizes the phrase “leaving money on the table.”

So if you can do it, contribute enough to your 401(k) to get a full company match. Employers may match a certain percentage. For example, the median employer match is 4%, according to How America is saving the 2024 report from Vanguard. Let’s say you put in 4% and your employer adds another 4% to that amount. In this case, you double the contribution to 8% of your salary.

Even if you can’t make 4%, consistently contributing something is better than nothing. This will help you supplement your 401(k) and allow it to grow.

However, please note that not all employers provide relevant information or may not provide complete information. According to Vanguard’s report, 16% of plans used a 50% match formula on the first 6% of salary, making it the most popular option. In second place, 10% of plans had a formula that matched 100% of the first 6% of wages.

According to the analysis carried out The Pew Charitable Trusts.

Why You Should Invest in Your 401(k)

If you have access to a 401(k) and match, you can take advantage of some serious tax benefits by contributing.

“The money is provided before taxes. Let’s say I made $50,000 and invested $5,000. Well, I only pay income taxes on $45,000. So everything I invest reduces my taxable income,” Azuri said.

This way, you can be rewarded for saving in your 401(k) with tax benefits for the current year. But you can’t avoid tax inspectors forever. Instead, you pay taxes on 401(k) withdrawals in retirement. But this can work in your favor.

“Now you don’t pay taxes, it can earn interest on the investment. You don’t pay taxes on your profits yet. And then when you retire and get into a lower tax bracket, that’s when you want to pay taxes. You don’t want to pay them now when you’re in the highest tax bracket. And if your income in retirement is the same as at work, God bless you. You win,” Azuri said.

Get the most out of your 401(k)

To make sure you’re getting the most out of your 401(k) plan, understand your personal risk tolerance for investing and your ideal time horizon. How much risk you are willing to accept will determine the progress of your investments, as well as the amount of time you have until retirement.

“For effective ways to invest your recurring contributions, seek assistance from your plan advisor or personal financial advisor. Diversification is very important,” said the certified financial planner. William Bevins.

You want your 401(k) to work for you while you work for them so you can eventually retire.