Maximize Your 401k Savings: IRS Contribution Limits

Maximize Your 401k Savings: 2024 and 2025 IRS Contribution Limits

Jenius Bank Team3/16/2023 • Updated 11/13/2024

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Doing your research when it comes to your 401(k) may help you make informed investment decisions.We know that retirement might feel far away, but it’s closer than you realize. In our Mind-Money Connection survey nearly half of respondents reported that their primary source of financial stress was over having enough money saved for retirement.A 401(k) plan is often one of the best ways to save for those years and worth exploring through your employer, especially if part of your compensation includes the employer matching your contributions. We realize that the contribution rules and limits may be confusing. If you’re looking to make the most of your 401(k) contributions, it’s important to understand the rules and limits involved with contributing to the account. This information is not tax or investment advice. You should consult with a tax advisor and/or a qualified investment professional for advice specific to your particular circumstances.

Key Takeaways

401(k) contributions have individual and annual contribution limits that are adjusted annually. For all contributors, the 2024 individual limit was $23,000 and was raised to $23,500 for 2025. For those over 50, the catch-up contribution limit is $7,500 in 2025.
If you contribute beyond these limits, you should fix this before April 15^th to avoid major tax implications.
It’s important to check on your contributions regularly, for example when you earn a pay raise or change jobs.

401(k) Plans and Contribution Limits

Before diving into the specifics, let’s clarify the basics. A 401(k) plan is a retirement savings plan sponsored by your employer. It allows you to save and invest a portion of your paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account, making it a powerful tool for tax-deferred growth. A Roth 401(k) works in a similar manner, except taxes are withheld when you make the contributions, and withdrawals on contributions and earnings are tax-free in retirement. When you decide to start putting money away for retirement you need to keep the contribution limits set by the Internal Revenue Service (IRS) in mind. These limits include an individual contribution limit and an overall contribution limit.Both limits are adjusted each year based on cost-of-living and apply to traditional 401(k)s and Roth 401(k)s. In addition to adjusting these limits, the IRS may also adjust the catch-up contribution limit for participants over 50. If you have a multiple 401(k) accounts the limits apply collectively. Say you have a Roth 401(k) and a traditional 401(k), in 2025 you cannot defer more than $23,500 in total to these two accounts.¹The individual contribution limit applies to the amount you may personally divert from your paycheck into your 401(k) account each year.²

Type of Contribution	2024 Limit	2025 Limit
Individual Contribution	$23,000	$23,500
Catch-up Contribution (for individuals over 50)	$7,500	$7,500
Catch-up Contribution (for workers aged 60-63)	N/A	$11,250

The Secure 2.0 Act increased the catch-up contributions for active 401(k) participants aged 60 to 63. Effective for the 2025 tax year, these individuals may contribute up to $11,250 in catch-up contributions.³The idea behind these limits is to keep the tax benefits fair between lower and higher compensated employees. Remember, money you put into your traditional 401(k) isn’t taxed until you take it out. Taxes on withdrawals depend on your age and your income in that year. Keep in mind that if you withdraw funds prior to age 59 ½, you also pay a 10% early withdrawal penalty on your 401(k) distribution, unless an exception applies . In addition to your individual contribution limit, there are also total annual limits on 401(k) contributions that apply to the combined total of contributions from you and your employer. We’ll talk about these limits next.

Employer 401(k) Contributions

Don’t forget about employer contributions! Many companies offer a 401(k) match as part of your compensation package, so make sure you take advantage of this money—you’ve earned it! These types of programs may motivate you to save at a higher rate than you anticipated. You may thank them later when you have a bigger nest egg in retirement. A company’s contributions don’t count toward your individual contribution limit. However, there are annual limits on how much you and your employer may collectively contribute to your 401(k) account. The IRS enforces the following in total dollar contributions per account:⁴

$69,000 for 2024 and $70,000 for 2025
$76,500 for 2024 and $77,500 for 2025 for individuals over 50

If you make less than these amounts, you and your employer cannot collectively contribute more than 100% of your total salary.Let’s translate these numbers into an example. Say you were 34 in 2024 and earned a pre-tax salary of $150,000. Since you were under 50, the IRS won’t allow you and your employer to collectively contribute more than $69,000 to your 401(k). So, let’s say you contribute $23,000 to your 401(k) and your employer has a 6% match; this means they match the first 6% you put into your 401(k), so they contribute $9,000 to your account. This results in $32,000 being put into your 401(k) account in 2023, well below the annual contribution limit. But what if you could afford to put more money into your 401(k)? That’s where after-tax contributions come into play.

After-Tax 401(k) Contributions

For high-income earners, it's important to be mindful of the annual total contribution limits, including employer contributions. Engaging in after-tax contributions, if permitted by your plan, may also be a viable strategy to maximize your savings.Some employers allow employees to contribute after-tax money to their 401(k) accounts. How does that work? Let’s hop back to our example where $32,000 has been contributed to your account. If your plan allows for after-tax contributions, you could put up to $37,000 of after-tax money into your 401(k) before you hit the annual limit of $69,000 for 2024.Not all plans allow for after-tax contributions, so be sure to check with your benefit specialist to see if this is an option for you.

Strategies for Maximizing Your 401(k) Contributions

So, how do you make the most of these limits and set yourself up for a comfortable retirement? Let’s review some strategies.

Start Saving Early: Start contributing to your 401(k) as early as possible to maximize compound interest, as it allows your savings to earn returns over time and be reinvested to generate more earnings. Starting to make contributions early in your career may help you build a larger retirement fund.
Increase Payroll Deferrals: Gradually increase your payroll deferrals over time to enhance savings. When you receive a raise, consider allocating part of your raise to your 401(k). You’re already accustomed to the cash flow at the lower salary. And the money invested in retirement could help you significantly in the future.
Take Advantage of Employer Match: Make sure to contribute enough to qualify for your employer’s match program, which is essentially free money toward your retirement! Employer matches often come with conditions, such as requiring you to contribute a certain percentage of your salary to receive the full match. Be sure to understand the conditions to receive the full match and avoid leaving money on the table.

Common 401(k) Contribution Questions

We know there are a lot of rules out there about 401(k)s and keeping up with all of them is tough. Let’s answer a few of the most common ones here.

If I Have More Than One 401(k), How Do the Limits Affect Me?

It’s rare to be contributing to two 401(k)s at the same time, but if you are, the individual and annual limits apply to the combined total of contributions to all 401(k) accounts, traditional and Roth, that you contribute to in a year. The most common way to have multiple 401(k)s is by changing jobs mid-year and having a 401(k) with your previous employer. Be sure to pay attention to how much you’ve contributed to your 401(k) at your previous company when setting up contributions at your new company to avoid going over the total contribution limit.It may also make sense to roll your old 401(k) over to your new company’s plan. Chat with a financial advisor about the investment options for each plan to figure out which portfolio fits with your retirement goals and your risk tolerance.

Will My 401(k) Contributions Automatically Stop When I Hit the Limit?

Depending on the company you work for, your plan may automatically stop your contributions when you hit the limit. They may have measures in place to prevent you from setting your contribution amount too high or stop more money from going into your 401(k) once you’ve contributed the maximum.However, not all companies have these policies in place, so you may have to watch your account and ensure that you aren’t adding too much money. Be sure to ask your benefits manager about your company’s safeguards when setting up your 401(k).To help prevent going over the contribution limits, keep the following in mind:

Check the contribution limits each year
Reassess your contribution amount whenever you get a salary adjustment
If you change employers, check how much you contributed to your previous 401(k) and factor that into your new contribution amount

If you accidentally overcontribute to your 401(k), you want to act as soon as possible to avoid paying penalties.

What Happens if You Exceed the 401(k) Contribution Limit?

Let’s say you get a big raise in April (congrats!), but you don’t change your 401(k) contribution. The year ends and you get an update from your retirement plan, and you realize you contributed $35,000 to your 401(k) in 2024. Oops! This situation is fixable. The first thing you should do is contact your plan administrator as soon as possible. They should be able to help you resolve the situation by requesting a “corrective distribution” from your plan. This corrective distribution will be added to your taxable income for the last year, so you also receive an amended W-2. Any interest that was earned on the extra contributions are included in your tax bill and are reported on a 1099-R Form. Don’t wait too long to request this fix. If you withdraw the extra money before April 15, aka Tax Day, the money isn’t considered part of your gross income for that year. This means if you over-contributed to your 401(k) in 2024 and request a corrective distribution before April 15, 2025, the money that is refunded to you is only considered part of your 2024 taxable income. However, if you make the correction after April 15, 2025, the distribution is now considered part of your taxable income for 2024 and 2025. If you’re younger than 59 ½, you’d also pay a 10% early distribution penalty. Keep in mind that the paperwork may take some time to process, so if you notice that you’ve put aside too much money, try to correct the situation as soon as possible.

Final Thoughts

If saving in a 401(k) is a key part of your retirement planning, then learning the rules of that 401(k) comes with the territory. As your contributions grow, knowing how to navigate the limits could save you some headaches (and money) along the way.Of course, any retirement planning and preparation involves important money decisions, so be sure to do your research before making major adjustments. If you have questions about contributing to your 401(k), reach out to your plan administrator or a professional retirement adviser to learn more about your specific situation. Maxed out your 401(k) contributions or need a bit more liquidity with your savings? Consider a Jenius Bank high-yield savings account and put your savings to work today.

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