Are you saving for retirement? You can put more money into your plan at work next year. The IRS raised the 401(k) contribution limit to $23,500 in 2025 from $23,000 in 2024, according to a Friday’s announcement.

The $500 increase also applies to other workplace retirement vehicles, such as the 403(b), 457, and Thrift Savings Plan.

Each year, the IRS may make changes to the contribution limits due to cost-of-living adjustments. The agency also announced a big boost to catch-up contributions for workers aged 60 to 63.

Recovery contributions

Catch-up contributions are intended to help employees nearing retirement. They set limits but allow employees of a certain age to save even more than the traditional limit.

“The recovery is designed to allow older workers who weren’t able to put enough money away in their younger years to now forgo larger contributions, catching up,” said Lawrence Sprung, CFP, founder of Mitlin Financial and author. of “Personalized financial planning.”

If you’re 50 and older, you can save an additional $7,500 in your 401(k), an amount unchanged for 2025. In other words, savers over 50 can max out their 401(k) by contributing up to $31,000 in 2025.

But thanks to the SECURE 2.0 Act, those ages 60 to 63 have a higher contribution limit of $11,250 in 2025. That’s a significant increase, allowing these employees to contribute a total of $34,750 to their plan 401(k) in 2025.

“Employees, especially if they are currently maxing out or turning 50, 60, 61, 62 or 63, should make sure they take advantage of the new limits available,” Sprung said. “May wish to update their contributions from 1 January 2025 to reflect the new increased limits. Waiting until later than 2025 may require the employee to put too much into each paycheck to meet the newly increased cap.”

The Struggles to Maximize a 401(k)

Despite higher contribution limits, only a small percentage of workers end up exceeding their 401(k) maximum, leaving them vulnerable and with few resources for retirement.

“Only about 14 percent of people max out their 401(k), and that’s the problem. If people are really paying attention, pensions disappear, social security is a big mess in about 10 years. And if people are going to have a really meaningful retirement, they’d better start saving,” said Steve Azoury, Chartered Financial Advisor and owner of the company. Azoury Financial.

When broken down into monthly payments, to max out your 401(k) in 2025 and contribute $23,500, you’d need to save about $1,958 per month. That’s a big chunk of change for most people and could be equivalent to your house payment.

For those with more discretionary income, contributing up to the limit can offer the most tax benefits and also put them on track to build their nest eggs.

Others with limited resources still have options.

What to do if you can’t max out

Depending on your income and expenses, contributing up to the 401(k) limit may be unaffordable. But that doesn’t mean you shouldn’t invest in your 401(k) or take advantage of your employer match — funds that are an integral part of your compensation package. Not profiting is the expression “leaving money on the table”.

So if you can swing it, contribute enough to your 401(k) to get the full company match. Employers can match a certain percentage. For example, the median employer match is 4%, according to How America Saves 2024 Report from Vanguard. So let’s say you put in 4% and your employer matches that amount with another 4%. In this case, you double the contribution to 8% of the salary.

Even if you can’t make 4%, contributing something consistently is better than nothing. It helps cover your 401(k) and allows it to grow.

However, note that not all employers offer a match or may not offer a full match. According to Vanguard’s report, 16 percent of plans had a 50 percent matching formula for the first 6 percent of salary, making it the most popular option. Coming in second, 10% of plans had a 100% matching formula for the first 6% of salary.

Forty percent or more of small business employers do not offer retirement benefits, according to analysis by the The Pew Charitable Trusts.

Why You Should Invest in a 401(k)

If you have access to a 401(k) and a match, there are some major tax advantages you can take advantage of by contributing.

“The money is tax-based. So let’s say I won $50,000 and put in $5,000. Well, I only pay income taxes on $45,000. So whatever I put in reduces my taxable income,” Azoury said.

So you can be rewarded for saving in your 401(k) with tax benefits for the current year. But you can’t avoid the tax man forever. Instead, you pay taxes on your 401(k) withdrawals when you retire. But that can work in your favor.

“Don’t pay taxes now, it can earn interest on an investment. You still don’t pay taxes on the earnings. And when you retire and you’re in a lower tax bracket, that’s when you want to pay your taxes. You don’t want to pay them now when you’re in the highest tax bracket. And if your income is as retired as working, God bless you. You win,” Azoury said.

Get the most out of your 401(k)

To make sure you get the most out of your 401(k), understand your personal risk tolerance while investing and your ideal time horizon. How much risk you can bear will determine the course of your investments, as will how long you have until retirement.

“For effective ways to invest periodic contributions, seek help from your plan advisor or a personal financial advisor. Diversification is very important,” said the certified financial planner William Bevins.

You want your 401(k) to work for you while you work for them so that eventually, one day, you have the option to retire.