Retirement may seem far off, but smart saving now can make all the difference—and a 401(k) is one of the best ways to do that. If your employer offers a 401(k) or Roth 401(k), contributing as much as you can in 2025 is a smart way to build your nest egg.
If you’re not already contributing the maximum allowed, this might be the year to bump your contributions. Thanks to tax-deferred compounding (or tax-free for Roth accounts) growth, even small increases can make a big difference in your retirement savings.
With a 401(k), you choose to set aside a certain amount of your paycheck, and your employer contributes it to your retirement plan. Contribution limits are adjusted for inflation annually with a modest increase in 2025. The limit will be $23,500 (up from $23,000 in 2024).
Employees who are 50 or older by year-end can also make an additional $7,500 in “catch-up” contributions, allowing them to save up to $31,000 in 2025 (up from $30,500 in 2024).
Starting in 2025, a new law allows certain 401(k) plan participants to contribute even more. Those who are 60, 61, 62 or 63 in 2025 can make catch-up contributions of $11,250.
Note: These contribution amounts also apply to 403(b)s and 457 plans.
Traditional 401(k)s
A traditional 401(k) has several benefits, including:
- Pretax contributions. These can lower your modified adjusted gross income (MAGI) and may even help you reduce or avoid the 3.8% net investment income tax.
- Tax-deferred growth. This means you won’t pay income tax on the earnings until you take distributions.
- Employer matching. The option allows your employer to contribute pretax funds, potentially matching some or all of your contributions.
If you already have a 401(k) plan, take some time to review your contributions and consider increasing your contribution rate to get as close to the $23,500 limit (plus any eligible catch-up amount) as your budget will allow. Since the contributions are pretax, you’ll also see a reduction in taxable income on your paycheck.
Roth 401(k)s
If your employer also offers a Roth option in its 401(k) plans, you can choose to make some or all of your contributions as Roth contributions. While these won’t reduce your current MAGI, qualified distributions will be tax-free.
Roth 401(k) contributions can be particularly beneficial for higher-income earners who aren’t eligible to contribute to a Roth IRA. This is because the ability to contribute to a Roth IRA is reduced or phased out once your adjusted gross income (AGI) exceeds certain amounts.
Planning for the future
If you have questions about how much to contribute or how to best balance traditional and Roth 401(k) contributions, reach out to your Smolin advisor. We’re also here to help you explore additional tax and retirement-saving strategies that might fit your needs.