Retirement might feel like a distant concern when you’re young and full of energy, but starting to save now can make a significant difference in your future financial stability. One of the best ways to save for retirement is through employer-sponsored retirement plans, such as 401(k)s, 457(b)s, and others. However, understanding the contribution limits and how they change over time is essential to making the most of these tax-advantaged accounts.
This blog will walk you through the key retirement plan contribution limits for 2024 and 2025, compare them, and help you understand how these changes might impact your savings strategy.
Types of Retirement Plans
Before diving into the contribution limits, let’s first define a few of the most common retirement plans and link them to the IRS for further details:
1. 401(k) Plan
- How It Works: A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary before taxes are taken out. The money grows tax-deferred until retirement, at which point you pay taxes on the withdrawals. Some employers also offer matching contributions, where they contribute a percentage of your salary based on how much you contribute.
- Benefits: Contributions are tax-deferred, meaning you don’t pay income taxes on the money until you withdraw it. Additionally, many employers offer a matching contribution, which is essentially free money for your retirement.
- IRS Link for 401(k) Information: IRS 401(k) Plan Information
Example: Sarah is 28 and works at a tech company that offers a 401(k) plan. She decides to contribute the maximum limit of $23,000 in 2024. Her employer also contributes 5% of her salary, which is $2,500. By the end of the year, Sarah’s 401(k) balance grows to $25,500 (her $23,000 contribution + $2,500 employer match).
2. 457(b) Plan
- How It Works: The 457(b) plan is a type of retirement plan offered by government and certain non-profit employers. Much like a 401(k), employees can contribute a portion of their salary to the plan on a pre-tax basis, and the contributions grow tax-deferred. The key difference is that 457(b) plans often have fewer withdrawal restrictions compared to 401(k)s.
- Benefits: Contributions are tax-deferred, and there are no early withdrawal penalties if you separate from your employer before age 59½. This is a unique benefit of 457(b) plans.
- IRS Link for 457(b) Information: IRS 457(b) Plan Information
Example: Jason, 35, works for a local government agency that offers a 457(b) plan. He contributes $23,000 of his salary to his 457(b) plan. If his employer also matches 5%, that’s an additional $2,300. In total, Jason’s retirement savings in his 457(b) plan for 2024 would amount to $25,300.
3. IRA (Individual Retirement Account)
- How It Works: An IRA is a retirement savings account that individuals can open independently of their employer. There are two main types of IRAs: Traditional IRAs and Roth IRAs. In a Traditional IRA, contributions may be tax-deductible, and you pay taxes when you withdraw the money in retirement. In a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
- Benefits: IRAs offer flexibility since they are not tied to your employer, and Roth IRAs provide the benefit of tax-free withdrawals in retirement, which can be a big advantage if you expect to be in a higher tax bracket when you retire.
- IRS Link for IRA Information: IRS IRA Information
Example: Emma, 29, wants to supplement her retirement savings with an IRA. She contributes $6,500 to a Roth IRA in 2024. Since Roth IRAs are funded with post-tax dollars, Emma will pay taxes on the money now, but her withdrawals in retirement will be tax-free (as long as she meets the rules). Over time, she will benefit from tax-free growth, making her Roth IRA a powerful savings vehicle for retirement.
4. 403(b) Plan
- How It Works: A 403(b) plan is similar to a 401(k) but is typically available to employees of public schools, universities, and certain non-profit organizations. Like a 401(k), contributions are made pre-tax and grow tax-deferred. Some 403(b) plans allow employees to invest in annuities or mutual funds.
- Benefits: 403(b) plans offer the same tax benefits as 401(k)s, with the added advantage for educators and public service workers of being able to save for retirement through payroll deductions.
- IRS Link for 403(b) Information: IRS 403(b) Plan Information
Example: Mark works as a teacher at a public high school and participates in his school’s 403(b) plan. He decides to contribute the full $23,000 for the year. The school matches 3% of his salary, which is $1,800. In total, Mark’s 403(b) plan will have $24,800 by the end of the year.
5. Simple IRA
- How It Works: A SIMPLE IRA is a retirement plan for small businesses and self-employed individuals. It allows employees to contribute a portion of their salary, and the employer is required to either match contributions or make a fixed contribution to employee accounts.
- Benefits: SIMPLE IRAs are easier and less costly to administer than other types of retirement plans, making them ideal for small businesses. Employers are required to contribute, either matching employee contributions dollar-for-dollar up to 3%, or making a fixed contribution of 2% of the employee’s salary.
- IRS Link for SIMPLE IRA Information: IRS SIMPLE IRA Information
Example: Jane works for a small business that offers a SIMPLE IRA. She is 27 and contributes $15,500 in 2024. Since the company matches 3%, Jane also receives $465 in employer contributions. By the end of the year, her SIMPLE IRA balance is $15,965.
Contribution Limits for 2024 and 2025
Each year, the IRS adjusts the contribution limits for retirement accounts to account for inflation. Here’s a breakdown of the contribution limits for some of the most popular plans in 2024 and the expected changes for 2025:
| Plan Type | 2024 Contribution Limit | 2025 Contribution Limit | Increase |
|---|---|---|---|
| 401(k) | $23,000 | $23,500 | $500 |
| 457(b) | $23,000 | $23,500 | $500 |
| IRA | $7,000 | $7,000 | 0 |
| 403(b) | $23,000 | $23,500 | $500 |
| Simple IRA | $16,000 | $16,500 | $500 |
The information below summarizes the retirement plan contribution limits for 2025.
| Plan | Normal Limit | Age 50 Catch-up Limit | Pre-Retirement Catch-up Limit | Age 60-63 Catch-up Limit* |
|---|---|---|---|---|
| 457(b) | $23,500 | $7,500 | $23,500 | $11,250 |
| 401(a) | $70,000 | N/A | N/A | N/A |
| 401(k) | $23,500 | $7,500 | N/A | $11,250 |
| 403(b) | $23,500 | $7,500 | $15,000 lifetime cap | $11,250 |
| IRA | $7,000 | $1,000 | N/A | N/A |
Combined employee and employer contributions
The combined limit is $70,000, which is an increase from $69,000 in 2024.
In 2025, the combined limit for employee and employer contributions to a 401(k) is $70,000 for employees under 50, $77,500 for employees 50 and older, and $81,250 for employees between the ages of 60 and 63:
Employees under 50
The combined limit is $70,000, and the employee contribution limit is $23,500.
Employees 50 and older
The combined limit is $77,500, and the employee contribution limit is $31,000 with a catch-up contribution of $7,500.
Employees aged 60-63
The combined limit is $81,250, and the employee contribution limit is $33,500 with an enhanced catch-up contribution of $11,250.
The SECURE 2.0 Act allows eligible participants between the ages of 60 and 63 to make “super-catch-up contributions” of up to the greater of $10,000 or 150% of the regular catch-up limit.
Why These Increases Matter
These increases might seem small, but they add up over time. If you’re able to contribute the maximum amount, you could potentially save thousands more in a given year. For example, if you’re under 50 and max out your 401(k) contributions, the $500 increase in 2025 means an additional $500 invested in your future. Over time, this could have a compounding effect, significantly increasing your retirement savings.
Tips for Maximizing Your Contributions
- Start Early: The younger you start contributing, the more time your money has to grow.
- Max Out Contributions: If you can, try to contribute the maximum allowed by the IRS. This can help you take full advantage of tax deferrals and employer matching (if applicable).
- Automate Your Contributions: Set up automatic transfers to your retirement accounts so you don’t have to think about it every month.
- Utilize Catch-Up Contributions: If you’re 50 or older, don’t forget about catch-up contributions. These extra contributions allow you to save more as you approach retirement.
Conclusion
Understanding the contribution limits for retirement plans is essential to planning for your future. While these limits might change slightly each year, making the most of these changes can significantly boost your retirement savings. Whether you’re contributing to a 401(k), 457(b), IRA, or other retirement accounts, it’s crucial to stay informed and contribute as much as you can.
Starting early and maximizing your contributions can pay off in the long run, giving you a solid financial foundation for retirement. So, take advantage of the 2024 and 2025 contribution limits and start building your future today!
If you have any questions or want to explore retirement planning further, feel free to leave a comment. Happy savings!
