Understanding Contribution Limits
The IRS establishes annual contribution limits for retirement accounts in order to promote equitable savings opportunities and to prevent high-income earners from disproportionately benefiting from tax-advantaged retirement plans. These limits are set by the IRS and work to encourage people across all income levels to save for retirement while making sure the tax benefits are distributed fairly. When you adhere to these limits you're actually optimizing your tax advantages, so don't fret about not being able to contribute more. Sticking to these limits will help you build a robust retirement portfolio, which will ultimately influence your financial security when you retire.
2025 Contribution Limits Overview
Account and Contribution Limit
• 401(k), 403(b), and most 457 plans: $23,500
• 401(k) catch-up contribution (age 50+): $7,500
• Total 401(k) contribution limit (employee + employer): $70,000
• IRA (traditional and Roth): $7,000
• IRA catch-up contribution (age 50+): $1,000
401(k) Contribution Limits
Employee Contribution Limits
For the 2025 tax year, the maximum amount employees can contribute to their 401(k) plans has increased to $23,500, up from $23,000 in 2024. This limit encompasses all elective salary deferrals, including contributions to a Roth account within the 401(k).
The catch-up contribution for individuals aged 50 and older remains unchanged at $7,500, bringing the total contribution limit to $31,000. However, employees aged 60 to 63 can benefit from a higher catch-up contribution of $11,250, increasing their total contribution limit to $34,750.
Employer Contributions
Employers can also contribute to your 401(k), and the total contribution limit for both you and your employer combined has increased from $69,000 to $70,000 in 2025. For those aged 50 and older, the limit rises to $77,500 with a catch-up contribution of $7,500. Additionally, if you’re aged 60 and older the limit also rises to $81,250 with a higher catch-up contribution of $11,250. These matching contributions are a great way to help you save more for retirement, though the tax advantages are limited when compared to pre-tax and Roth contributions.
Traditional and Roth IRA Contribution Limits
Contribution Limits for 2025
If you have a traditional or Roth IRA, the contribution limit remains at $7,000, with an additional catch-up contribution of $1,000 for those aged 50 and over. This would bring your total contribution limit to $8,000 which can help you bolster your retirement funds and ensure you have ample resources as you get closer to ditching your job for good.
Income Limits and Eligibility
If you want to contribute to a Roth IRA in 2025, you'll need to adhere to specific income thresholds based on your modified adjusted gross income (MAGI) and your tax filing status. If you're single and your MAGI is below $150,000, you can contribute the full $7,000 (or $8,000 if you're 50 or older), though the contributions start to phase out if your MAGI is between $150,000 and $165,000—and you can't contribute at all if your MAGI exceeds $165,000.
If you're married and filing jointly, the full contribution limit applies if your combined MAGI is under $236,000, with a phase-out range between $236,000 and $246,000. If your combined MAGI is over $246,000, you won't be able to contribute to a Roth IRA.
Other Retirement Accounts
SEP-IRAs
Simplified Employee Pension Individual Retirement Account (SEP-IRA) is not only a mouthful to say, but it's an attractive option for both small business owners and those who are self-employed to save for retirement. The contribution limit for 2025 is 25% of an employee's compensation up to a maximum of $70,000 and applies to both employees of small businesses and people who are self-employed. Remember, this only applies to you if you're a sole proprietor, a business owner in a partnership, or if you earn self-employment income.
SIMPLE IRAs
Savings Incentive Match Plan for Employees Individual Retirement Account is even more of a mouthful but it's also an IRA designed to provide small business owners and those who are self-employed with a straightforward way to save for retirement. The contribution limit for employees is $16,500 (up from $16,000 in 2024) and employees over 50 can make catch-up contributions of up to $3,500, raising their total limit to $20,000. SIMPLE IRA contributions are made pre-tax, which means they reduce your taxable income for the year. The money grows tax-deferred until you withdraw it in retirement. Employers must either match employee contributions up to 3% of their salary, or contribute a non-elective contribution of 2% of the employee's compensation, even if the employee doesn’t contribute. However, employers cannot make elective deferrals—which are the contributions made by the employee themselves.
Special Considerations
Highly Compensated Employees (HCEs)
If you earned income over $155,000 last year or own more than 5% of a business and participate in a 401(k) plan, your contribution limits can be affected by Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests which compare the contribution rates of HCEs and non-HCEs. If your plan fails, you may be required to lower your contributions or take distributions to maintain compliance.
Excess Contributions
If you contribute more than the limit allows, you'll want to act swiftly. Notify your employer or plan administrator and withdraw the excess funds by April 15 to avoid any penalties. If you don't, the IRS will impose a 6% excise tax for each year it isn't dealt with and would be subject to regular income tax—meaning you could face double taxation on any earnings on the excess if you delay. If this applies to you, it may be wise to speak to a tax professional.
