A 401(k) plan is one of the most effective ways to save for retirement. This employer-sponsored, tax-deferred retirement plan allows you to invest a portion of your paycheck before taxes, depending on the type of contribution.
The IRS sets annual limits on the maximum amount you can contribute to a 401(k) plan to ensure compliance with tax regulations.
What Is a 401(k) Plan?
A 401(k) plan is an employer-sponsored retirement savings plan in which employees can invest a portion of their paycheck before taxes. These contributions are often tax-deductible, reducing their taxable income and increasing their take-home pay.
Originally introduced as an alternative to traditional pension plans, which are now rare, 401(k) plans enable employers to match a portion of their employees' contributions. Employers typically match up to a specific percentage of an employee's salary.
Employers invest employee contributions in various options, such as stocks, bonds, money market funds, and mutual funds.
Changes to 401(k) Contribution Limits in 2025
The 401(k) plan is a primary retirement savings tool, and the IRS sets annual contribution limits.
- For 2025, the maximum contribution limit rises to $23,500, a $500 increase from the 2024 limit of $23,000.
- The catch-up contribution for individuals aged 50 and over remains at $7,500.
- Employees aged 60 to 63 can make a larger catch-up contribution of up to $11,250.
The contribution limit for Roth 401(k) plans matches that of traditional 401(k) plans. If you have access to both, you can contribute to each as long as the total contributions do not exceed the overall limit of $23,500 in 2025. Contributions to other retirement plans, such as IRAs, do not impact this limit.
For 2025:
- The combined contribution limit for employees and employers cannot exceed $70,000 or 100% of the employee's salary, whichever is less.
- For employees aged 50 to 59 and those 64 or older, the combined limit is $77,500 or 100% of the employee's salary, whichever is less.
- Employees aged 60 to 63 have a combined limit of $81,250 or 100% of the employee's salary, whichever is less.
Employers match employee contributions based on the specific terms of the plan. They may offer a dollar-for-dollar match or contribute a percentage of the employee's contributions or wages.
Employer matching contributions do not count toward the employee's annual contribution limit as long as the total combined contributions remain within the set limits. This matching contribution is "free money" for employees, provided they remain with the employer long-term.
Types of 401(k) Plans
A 401(k) plan offers multiple options based on employer preferences and business types. The two primary types of 401(k) plans include:
- Traditional 401(k): Contributions are made tax-free, and you pay taxes when you withdraw funds during retirement.
- Roth 401(k): Contributions are made after taxes; you can withdraw the funds tax-free during retirement.
Other types of 401(k) plans include:
- Solo 401(k): Designed for self-employed individuals or small business owners without employees.
- Simple 401(k): Simplified options for small businesses with fewer than 100 employees.
- Safe Harbor 401(k): Designed to reduce administrative complexities for employers while ensuring employees receive minimum contributions.
Each plan type has unique rules. For example, employers offering traditional 401(k) plans may not offer other plan types.
Individuals can diversify their retirement strategy by exploring other retirement savings options, such as IRAs and 401(k) plans.
For more details, individuals should review the latest IRS notices and guidelines.