The information in this article is up to date for tax year 2024 (returns filed in 2025).
Saving for retirement can feel a bit like climbing a mountain. There are lots of paths to take, and the journey can seem daunting. Two popular paths are IRAs and 401(k) plans. Each offers different contribution limits and tax benefits, making it important to understand how much you can contribute to maximize your savings. In this article, we’ll break down the IRA and 401(k) contribution limits for 2025 so you can make sure you’re saving as much as possible for the future.
What is an IRA?
An IRA, or Individual Retirement Account is a retirement savings account that lets you invest money for your future while enjoying tax benefits. There are two main types of IRAs: Traditional IRAs and Roth IRAs.
- Traditional IRA: Contributions are tax-deductible, and you pay taxes when you withdraw the money in retirement.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
IRA contribution limits for 2025
For 2025, the IRA contribution limit is set at $7,000 for individuals under 50 years old. If you’re age 50 or older, you can add an extra $1,000 as a catch-up contribution, bringing your total to $8,000. That’s a nice little boost to help you save even more for retirement. The same limit applies whether you’re contributing to a Traditional IRA or a Roth IRA.
What is a 401(k)?
A 401(k) is a retirement plan offered by employers to help their employees save for retirement. It’s one of the best ways to invest because you can make automatic contributions from your paycheck. There are two main types of 401(k) plans:
- Traditional 401(k): Contributions are made before taxes, lowering your taxable income in the year you contribute. You won’t pay any taxes until you withdraw the funds in retirement.
- Roth 401(k): Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
One of the biggest perks is that your employer may offer a 401(k) match, which is essentially free money. Make sure you take full advantage of this benefit if it’s available.
401(k) contribution limits for 2025
The contribution limit for a 401(k) is much higher than an IRA. For 2025, the 401(k) contribution limit is set at $23,500. If you’re over 50, you can also make a catch-up contribution of $7,500, bringing your total to $31,000. Thanks to a recent change in SECURE 2.0, a higher catch-up contribution limit now applies to employees aged 60-63 who participate in a 401(k) plan. They can make catch-up contributions up to $11,250. The higher limit lets you save a lot more for retirement, especially if you start later in life.
Important things to remember
- The contribution limits can change each year based on inflation. So, always check the latest the latest IRA and 401(k) contribution limits.
- Don’t forget about penalties! Withdrawing funds from an IRA or a Traditional 401(k) before age 59 ½ typically results in a 10% penalty unless you qualify for an exception. Make sure you plan accordingly.
- Start saving as early as you can. The sooner you begin contributing to an IRA or 401(k), the more time your money has to grow. Experts recommend saving 10% to 15% of your pre-tax income each year.
Wrapping it up: Your retirement savings journey
Understanding the IRA and 401(k) contribution limits is essential for anyone serious about saving for retirement. Whether you’re saving through an IRA or a 401(k), it’s important to take full advantage of the tax benefits each offers. By contributing the maximum allowable amount, you can significantly boost your retirement savings over time – and lower your tax bill in the process.
As you focus on building your retirement savings, remember that filing your taxes correctly is just as important for your financial success. ezTaxReturn makes it easy to file your taxes online and claim all the money-saving deductions or credits you deserve.
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
