Changes to Contribution Limits for 401(k)s and IRAs in 2025

 Posted on November 29, 2024 in Taxation Law

Planning for retirement can be crucial for nearly everyone. Many people use employer-sponsored 401(k) accounts, or they may contribute to Individual Retirement Accounts (IRAs). There are certain limits on the amounts that can be contributed to retirement accounts each year, but these limits are regularly updated. Some taxpayers may also be able to "catch up" on contributions as they get closer to retirement, ensuring that they will have enough money saved to meet their needs in the future.

The Internal Revenue Service (IRS) recently announced adjustments to the contribution limits for retirement accounts, and these changes will go into effect in 2025. Understanding these changes is essential for taxpayers who are aiming to maximize their retirement savings and the associated tax benefits. An experienced San Jose, CA attorney can help address legal issues related to retirement contributions, ensuring that taxpayers can take advantage of tax benefits and that employers understand the requirements they must meet when offering retirement benefits for employees.

Increased Contribution Limits for 401(k) Plans and SIMPLE Plans

Starting in 2025, the IRS has increased the annual contribution limit for 401(k) plans to $23,500. In 2024, this limit was $23,000. The contribution limit for SIMPLE plans has increased from $16,000 to $16,500. These adjustments may allow employees to allocate more of their pre-tax income toward retirement savings while potentially reducing their taxable income for the year.

IRA Contribution Limits Remain Unchanged

The contribution limit for Individual Retirement Accounts (IRAs) will remain at $7,000 in 2025. This applies to both traditional and Roth IRAs. Taxpayers should note that although the contribution limit is unchanged, income thresholds for deductible contributions to traditional IRAs and eligibility for Roth IRAs may be subject to annual adjustments.

Catch-Up Contributions for Older Workers

For taxpayers aged 50 and older, catch-up contributions provide an opportunity to boost their retirement savings. In 2025, their catch-up contribution limit for 401(k) plans will continue to be $7,500, allowing them to contribute a total of $31,000. However, people aged 60 to 63 can make catch-up contributions up to $11,250, allowing them to contribute a total of $34,750.

For IRAs, the catch-up contribution limit for people aged 50 and older will continue to be $1,000. These people will be able to make a total contribution of $8,000 in 2025.

For people who participate in SIMPLE plans, the limit for catch-up contributions will continue to be $3,500. However, for people between the ages of 60 and 63 who participate in SIMPLE plans, the catch-up contribution limit will increase in 2025 to $5,250.

Tax Deductions and Income Limits

Contributions to traditional IRAs may be tax-deductible. However, these deductions may be phased out depending on a taxpayer's income and their participation in an employer-sponsored retirement plan. The IRS adjusts the income phase-out ranges annually. For 2025, the phase-out range for single taxpayers has been increased from $77,000-87,000 to $79,000-89,000. For married couples who file taxes jointly, the phase-out range has been increased from $123,000-143,000 to $126,000-146,000. For a person who contributes to an IRA, is not covered by an employer-sponsored retirement plan, and is married to someone who is covered, the phase-out range has been increased from $230,000-240,000 to $236,000-246,000.

Phase-out ranges for Roth IRA tax-deductible contributions have also increased. For single taxpayers and people filing as head of household, the range has been increased from $146,000-161,000 to $150,000-165,000. For married couples who file jointly, the range has been increased from $230,000-240,000 to $236,000-246,000.

Maximizing Retirement Savings

To take full advantage of these contribution limits and tax benefits, you may want to consider the following strategies:

• Review Contribution Limits: Make sure you understand the current limits that apply to your retirement accounts and plan your contributions accordingly.

• Utilize Catch-Up Contributions: If you are eligible, consider making additional contributions to boost your retirement savings.

• Monitor Income Thresholds: Be aware of the income limits that may affect whether you can deduct certain contributions or whether you may be eligible for certain accounts.

• Consult a Professional: Work with a tax professional to develop a retirement savings strategy that will be based on your specific circumstances and financial goals.

Contact Our San Jose, CA Tax Attorney for Retirement Benefits

To receive personalized guidance on how changes to tax laws may affect your retirement plans and how you can maximize your tax benefits, contact the San Jose, CA tax lawyer at John D. Teter Law Offices. We can help you understand the best ways to address retirement savings while maintaining compliance with IRS regulations. Call us today at 408-866-1810 to schedule a consultation.