What the new 401(k) limits and other changes mean for retirement

Come next year, you’ll be allowed to save more money in your 401(k) on a tax-deductible basis than you can this year, unless you’re in your 60s, in which case first, it will be allowed to save more.

The new contribution limit for 401(k)s and other retirement plans in 2025 will be $23,500, up from $23,000 currently, the Internal Revenue Service said Friday.

However, the IRS did not increase the limit on catch-up contributions — it’s the extra amount people age 50 and older can contribute annually to tax-advantaged plans like a 401(k) s, 403(b)s, 457 plans and the federal Thrift Savings Plan. The catch-up contribution limit will remain the same at $7,500.

Taken together, however, it means that anyone in their 50s next year can save up to $31,000 for their retirement nest egg, and those savings will not is subject to income tax in 2025.

But if you will be 60, 61, 62, or 63, because of the statutory retirement provision Secure 2.0, your contribution limit will go up for the first time next year. The IRS said it would be capped at $11,250, or 150% of the general catch provision. That means people in that age group can save up to $34,750.

Now for the truth: Most people don’t contribute much to their 401(k), even if they have a contribution limit in effect.

Vanguard, in its 2024 How America Saves report, found that only 14 percent increased their 401(k) savings by 2023. , and accumulated too many accounts,” according to report.

However, the fact remains that unless the US pension system is reformed to do a better job of providing workers with more retirement income than Social Security will provide, most private sector workers – no pensions. – will depend on their savings in job savings plans and elsewhere.

High income opportunities for IRAs

The IRS did not increase the contribution limits for individual retirement accounts, known as IRAs. The annual budget next year will remain at $7,000 and the contribution amount for those 50 and over will still be $1,000.

But it added modified adjusted gross income thresholds that determine whether you’re eligible to contribute to an IRA for tax purposes.

Starting with Roth IRAs — where your contributions are subject to income tax in the year you make them, but never withheld — if you’re single you can contribute to a Roth next year if your AGI not to exceed $165,000, $161,000. If you’re married and filing jointly, your AGI must not exceed $246,000 – up from $240,000 this year.

With a traditional IRA — where your contributions can be reduced in the year you make them, then grow tax-deferred until you’re retired — if you’re single and covered by an employment plan retire, your adjusted AGI must not exceed $89,000. , up from $87,000 this year. If you’re married and filing jointly and you’re personally covered by a retirement plan, your adjusted AGI must not exceed $146,000, up from $143,000. The limits are slightly different if your spouse owns the workplace plan but you maintain the IRA.

Changes made to Saver Credit

Low- and moderate-income workers who save something — anything — for retirement may be eligible to claim the Saver’s Credit, a dollar-for-dollar reduction of their tax bill.

To qualify next year, the IRS raised the income to $39,500 for single people, up from $38,350 this year; to $59,250 for heads of household, up from $57,375; and to $79,000, up from $76,500, for married couples filing jointly.

Here’s a helpful explanation of how credit works from Fidelity.