(NewsNation) — A change in 401(k) plans takes effect this year, which means some people who save in their retirement plans could maximize their savings.
The change — which applies to 401(k)s as well as 403(b)s, governmental 457(b) plans and the federal government’s Thrift Savings Plan — is a result of the Secure 2.0 tax law passed in 2022. It’s meant to give those who are approaching retirement age an opportunity to save more money.
A 401(k) is one of the most common retirement savings plans, which can be matched by your employer.
Now, people in this age group can contribute up to $11,250 into their account, which is similar to a savings account but for retirement. The previous limit was $7,500.
The Internal Revenue Service imposes contribution limits for tax purposes.
“This means employees closer to retirement have a chance to sock away an additional $3,750 in a tax-advantaged retirement account this year, which could make a difference in their nest egg long term,” said Elizabeth Ayoola, personal finance expert for NerdWallet, a financial service company. “Taking advantage of these catch-up contribution limits every year is a way to work smarter toward achieving retirement goals.”
Who is impacted by the 401(k) change?
The catch-up contribution limit increase applies to people who are 60 to 63 years old and who have a 401(k), 403(b) or governmental 457 plan.
“It can be especially helpful for older workers who are behind on retirement savings as they’re able to put more money away for retirement using these tax-advantaged accounts,” Ayoola told NewsNation. “One thing to triple-check is that your 401(k) allows increased catch-up contributions because if not, it could have unfavorable tax consequences.”
If you exceed the contribution limit, you will be double-taxed.
What is a catch-up contribution limit?
A catch-up contribution is an increase in the amount of money people 50 years or older can save in a 401(k) plan or other retirement plan in a year. The purpose is to save more for retirement.
Anyone with a retirement plan can save up to a certain amount within a year, per IRS regulations, but the catch-up contribution limit applies specifically to people older than 50. What’s more, the 2025 contribution change applies only to people between 60 to 63 years old.
“Some factors to consider to see whether it makes sense to utilize the catch-up contribution is where you are as it relates to your retirement goals,” Ayoola said. “People who are far behind may find the new change is a prime opportunity to put more of their dollars to work in the stock market. Those dollars get the unique opportunity to grow tax-free and consumers get to enjoy the tax advantages whether those happen before or after retirement.”
NerdWallet recommends using a retirement calculator to guide your financial decision-making.
What are the 401(k) contribution limits for 2025?
- Employee contribution limit: $23,500
- Catch-up contributions for employees 50 years old and older: $7,500
- Catch-up contributions for employees 60 to 63 years old: $11,250
What are the benefits of a 401(k)?
Employers may offer employer-sponsored retirement accounts, such as a 401(k), which means the company will contribute a percentage to your retirement savings.
“Employer-sponsored retirement plans like a 401(k) can be beneficial when employers offer a match, which is essentially free money up to a certain limit,” Ayoola said. “There aren’t many instances where you get free money towards retirement, so consumers should consider at least contributing enough to get the company match and then consider contributing to other accounts.
There are other retirement plans as well that offer different tax benefits, so NerdWallet suggests researching which one is best for your financial goals.
NewsNation’s Andrew Dorn contributed to this article.