Is It Time to Adjust Your 401(k) Contribution for 2025?

For the year 2025, reflect on your financial future and review your retirement savings strategy. One of the most effective ways to prepare for retirement is by adjusting your 401(k) contributions. With the IRS recently increasing the contribution limits for 2025, it’s crucial to understand how these changes affect your retirement planning.

Understanding the New 401(k) Contribution Limits for 2025

For 2025, the IRS has raised the contribution limit for 401(k) plans to $23,500, an increase from the previous limit of $23,000 in 2024. This change allows you to allocate more of your income toward retirement savings, potentially accelerating your path to a secure retirement. The catch-up contribution for individuals aged 50 and older remains at $7,500, ensuring that those who are closer to retirement can save even more (IRS, 2024).

The SECURE 2.0 Act, which was signed into law in late 2022, also introduced a significant change for individuals aged 60 to 63. These individuals are now eligible for an additional catch-up contribution of $11,250, which further increases their retirement savings potential. This is particularly important for those who may have started saving later in life or who need to boost their retirement savings quickly (IRS, 2024).

Why Should You Adjust Your Contributions?

There are several key reasons to adjust your 401(k) contributions for 2025:

• Tax Benefits: Contributions to a traditional 401(k) plan are tax-deferred, meaning they reduce your taxable income for the year you make the contribution. By increasing your contributions, you can lower your tax burden in the short term while saving for retirement in the long term.

• Employer Match: Many employers offer a matching contribution to your 401(k) plan, often up to a certain percentage of your salary. To take full advantage of this “free money,” it’s important to contribute enough to receive the maximum match. If you’re not contributing enough to hit this threshold, you could be leaving money on the table.

• Accelerating Your Savings: As you get closer to retirement, you may need to save more aggressively to meet your financial goals. Increasing your 401(k) contributions can help ensure that you have enough funds for retirement, particularly if you haven’t saved as much as you would have liked earlier in your career.

Maximizing your 401(k) contributions each year can significantly boost your retirement savings over time. This is especially true when factoring in compound interest, which allows your investments to grow exponentially.

How Other Retirement Accounts Factor Into Your Strategy

While the 401(k) plan is an important retirement savings tool, it’s not the only option available to you. Several other retirement accounts can complement your 401(k) contributions and further enhance your savings strategy.

1. Traditional and Roth IRAs: Both types of Individual Retirement Accounts (IRAs) allow you to save for retirement with tax benefits. In 2025, the contribution limit for IRAs remains at $7,000 for individuals under 50. However, for those aged 50 or older, the catch-up contribution limit is $1,000, bringing the total annual limit to $8,000. Contributions to a traditional IRA may be tax-deductible, depending on your income and whether you or your spouse are covered by a workplace retirement plan. Roth IRA contributions, on the other hand, are made with after-tax dollars, but the account grows tax-free, and qualified withdrawals are also tax-free (IRS, 2024).

2. Tax Implications of Contributions: As you increase your retirement savings through 401(k)s, IRAs, and other plans, it’s important to consider the tax implications. For traditional 401(k) contributions, the IRS allows you to defer taxes on the amount you contribute. However, when you withdraw the funds in retirement, you’ll pay ordinary income tax on those withdrawals. Roth accounts, however, require you to pay taxes upfront, but allow for tax-free withdrawals in retirement (IRS, 2024).

Understanding how these different accounts work together is essential in building a tax-efficient retirement strategy.

Diversifying Retirement Accounts

In addition to adjusting your 401(k) contributions, it’s worth considering how diversifying your retirement accounts can help you maximize your savings potential. While the 401(k) is a powerful tool, relying solely on it may limit your options in retirement, especially if tax laws change or you experience shifts in your income level.

For example, contributing to a Roth IRA can provide tax-free growth, which may be advantageous in retirement if your tax bracket is higher than it is today. On the other hand, contributing to a traditional 401(k) plan allows you to defer taxes and take advantage of the employer match, which can add significant value to your retirement savings.

It’s essential to maintain a balance between different types of accounts to create a flexible and robust retirement savings strategy. A financial planner or tax advisor can help you assess your current situation and recommend the best approach for diversifying your savings.

Timing Your Contribution Adjustments

To maximize the benefits of the new contribution limits for 2025, it’s important to make adjustments at the right time. Many 401(k) plans allow you to change your contribution percentage at any time during the year. However, some individuals may forget to adjust their contributions after receiving a raise or bonus.

Here are some tips for timing your 401(k) contributions effectively:

• Start Early: If you know you plan to contribute more in 2025, begin adjusting your contributions as soon as possible. Starting early allows your additional contributions to grow throughout the year.

• Review Your Budget: Increasing your 401(k) contributions means less take-home pay. Before making a significant change, make sure that the adjustment fits within your overall budget and won’t cause financial strain.

• Don’t Wait for Year-End: Waiting until the end of the year to adjust your contributions could mean missing out on the full benefit of the increased limits. It’s a good idea to review your contributions periodically throughout the year to ensure that you’re on track.

How Retirement Contributions Fit Into Your Estate and Tax Planning

Adjusting your 401(k) contributions not only impacts your retirement savings but also plays a role in your broader estate and tax planning. Estate planning ensures that your assets are managed according to your wishes, and 401(k) contributions can help minimize the taxes your heirs may owe on these assets after your death.

For example, reducing your taxable income through larger 401(k) contributions can help lower your estate’s overall value, which may reduce estate tax liabilities. Additionally, your 401(k) can be passed on to your beneficiaries, allowing them to continue the tax-deferred growth.

As part of your estate and tax planning, consider working with a financial planner or tax advisor to ensure that your retirement savings strategy aligns with your broader goals. It’s especially important to integrate your 401(k) contributions into a comprehensive estate and tax plan.

Conclusion

Adjusting your 401(k) contributions for 2025 can significantly enhance your retirement savings strategy. With the IRS increasing contribution limits and the SECURE 2.0 Act providing additional catch-up options, now is the time to review and maximize your contributions. This proactive approach will help accelerate your savings and take advantage of tax benefits while setting you on the path to a secure retirement.

However, it’s important to remember that 401(k) contributions should be part of a broader retirement plan. Consider diversifying your savings with additional accounts like IRAs, and ensure you’re optimizing your tax strategy. By balancing contributions across different accounts, you can build a more flexible and tax-efficient retirement portfolio.

Retirement planning is a personalized journey, and what works for one person may not be ideal for another. To ensure that your 401(k) and other retirement accounts align with your financial goals, it’s beneficial to consult with a financial planner or tax advisor. Taking the time now to make thoughtful adjustments can lead to greater financial security in the future.

At Walsh & Company, we are committed to providing comprehensive estate and tax planning strategies to help you secure your financial future. For more information, visit Walsh & Company.

References

1. Internal Revenue Service. “401(k) Limit Increases to $23,500 for 2025; IRA Limit Remains $7,000.” Newsroom. https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000.
2. Internal Revenue Service. “401(k) Plans.” Retirement Plans. https://www.irs.gov/retirement-plans/401k-plans.
3. Internal Revenue Service. “Retirement Topics – IRA Contribution Limits.” Plan Participant/Employee. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.