The IRS has announced the changes in the contribution limits of the 401K plan for 2025 in November 2024. The participants in the retirement plan who contribute to saving for their retirement should understand these changes.
The employees contribute a portion of their salary into the personal pension account through a 401k plan. As we move into 2025, now is the perfect time to delve into the changes and save more for their retirement.
401k Contribution Limits 2025
The 401k plan is employer-sponsored, where the employee matches the employee contribution to the retirement plan, that is, the defined contribution plan.
The plan has two types of 401k plan-traditional, where employee contributions allow tax deductions but the withdrawals are taxed, and Roth, where the contribution does not allow tax deductions, so withdrawals are tax-free.
The IRS adjusts the retirement plan contribution limits regularly, preventing the high-earners from saving more for the future while taking tax benefits. In Nov 2024, the agency increased the 401k plan annual contribution limit for individuals in 2025 to $23500 from $23000 for 2024.
The contribution limit increase is the same for people who participate in 203b, the government Thrift Savings Plan, and the governmental 457 plans. The RS annual contribution limit is the same $7000.
The defined contribution limit that includes deferrals, profit sharing, company matches, and other deposits will be hiked from $69,000 to $70,000 this year. Apart from the contribution limit, the agency has introduced other changes in the phase-out limit, catch-up contributions, etc.
2025 Phase-out Ranges for Retirement Plan
Taxpayers with traditional 401k plans get a tax deduction on their contribution when they meet certain conditions. The tax deductions may be reduced, eliminated or phased out when the taxpayer or their spouse has a retirement plan. The tax deduction depends on the participant’s income and filing status.
The agency has announced the phase-out ranges for 2025, which taxpayers who are covered by retirement plans at work should check:
- Individual taxpayers with a retirement plan at work have the phase-out range that is hiked to $79000 – $89000 from earlier $77000 – $87000 for 2024.
- Married couples who filed taxes jointly, where spouse IRA contribution is covered under the retirement plan at work, increased the phase-out range from $123000 – $143,000 to $126,000 – $146,000.
- Now, people who do not have a workplace retirement plan but his/her spouse is covered under such a plan will also see an increase in phase-out range from $230,000 – $240,000 to $236,000 – $236,000.
- Married but filing taxes individually and covered in the retirement plan at work will have a phase-out range that will not depend on the COLA and remains the same between $0 and $10,000.
- People who make contributions to the ROTH plan should know the phase-out range has also increased to $150,000 – $165,000 for heads of households and individuals, $236,000 – $246,000 for married couples who filed jointly,
Catch-up Contribution Changes for 2025
The catch-up contribution in a 401k plan reminds people aged 50 or older to save more for retirement through more contributions to the retirement saving plan than the standard limit applicable to the personal pension account. The additional contributions to the 401k or IRS Account allow more savings for retirement for the elderly.
With the contribution limit hike in the standard limit, the agency has also increased the catch-up contribution limit for employees aged 50 or above who participate in the SIMPLE retirement plans for 2025. According to the agency, the catch-up contribution limit for 2025 for people aged 50 or over remains the same at $3500 in 2025.
However, SECURE 2.0, the enhanced catch-up contribution limit for employees aged 60 to 23, the catch-up contribution limit for 2025 is $11250. So, the elderly aged 60 to 63 still working can save more for their retirement thanks to the SECURE 2.0 top-of deferral limit of $23,500.
What’s the savings rate under the 401k plan?
Since the contribution limit of the 401k plan has increased, the saving rate of the participants will also increase. The catch-up contribution adds to the retirement savings for people aged 50 and over. The agency has increased the catch-up contribution for employees aged 60 to 63 and will also increase the savings for retirement.
According to the reports, the contribution limit will boost the savings of the participants depending on their age and income. The participants with age 35 may save around 5.4% of their earnings for retirement savings and people who work at the age of 55 to 63 will save around 8.9% of their earnings.
What should you do when you contribute more to the 401k plan than the contribution limit?
If the retirement plan participants contribute more to the personal pension account in a year, you may have to pay taxes on the excess contribution. Taxpayers who do not wish to pay taxes should correct the excess contribution through their employer as they could inform the administrator.
You must remove the over contributed amount from the account before the end of the year to avoid penalties of excess tax on tax returns. The notice to the administrator should be offered before 01 March of the tax year after the excess deferral contribution and the excess amount should be returned before the tax day.
However, if the amount is contributed where the contribution is not taxed, you must modify your W-2 form and return the overcontributed amount. The taxpayers should know the overcontributed will be taxed when they contribute as well as when they withdraw, so try to not go over the limit when you contribute to the retirement plan.
The 401k plan contribution limit hikes means you can save more for your retirement and ensure a stable income during your retirement days, however, keep the contribution limit in mind as it excess contribution has consequences, such as 10% penalty on withdrawals, etc.