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There’s no time like the present to increase your retirement plan contributions, but those who commit more of their hard-earned salary to their retirement nest egg must be mindful of the IRS limit.
Indeed, the federal government places limits on the dollar amount individuals may contribute to tax-favored accounts each year, including individual retirement accounts and 401(k)s, which adjust annually to reflect cost-of-living increases. (Related: What is a "qualified" retirement plan)
The retirement plan contribution limit for 401(k), 457(b) and 403(b) plans is $23,000 for tax year 2024 (the tax returns you file in April 2025) and $23,500 for tax year 2025. If you are age 50 or older by the end of the calendar year, you may be eligible to make additional catch-up contributions of up to $7,500 in both 2024 and 2025, bringing the total you may contribute on a pre-tax basis to $30,500 in 2024 and $31,000 in 2025.1
Beginning on January 1, 2025, a new provision under SECURE Act 2.0 will enable employees ages 60 to 63 who participate in these plans to make higher annual catch-up contributions of up to $11,250 to a workplace plan.
The maximum yearly contribution to traditional and Roth IRAs is $7,000 for tax year 2024 and 2025. (Prior-year contributions for 2024 can be made up until the tax filing deadline on April 15, 2025.) The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment, but remains $1,000 for 2024 and 2025. In the case of a Roth, you may not be eligible to contribute that much, however, depending on your income or your filing status.2 (Related: The 2026 estate planning question mark)
Beginning with tax year 2024, Secure Act 2.0 also authorized employers to add pension-linked emergency savings accounts (PLESAs) to their defined contribution retirement plans. Eligible employees who opt to contribute can funnel up to $2,500 per year (or lower, as set by the employer) into these accounts. Unlike savings in a 401(k) or IRA, account holders can make withdrawals from their emergency account both tax- and penalty-free before age 59½, offering greater financial flexibility.4
Big returns
Even a minor increase to your retirement account contribution can yield big returns for your long-term financial security.
A 30-year-old woman making $60,000 a year with nothing yet saved for retirement would accumulate $917,749 by age 65 if she contributed 5 percent of her salary to her retirement plan. That assumes a 3 percent raise per year, a hypothetical 7 percent annual investment return, and 50 percent employer match, up to 6 percent of her salary, according to the AARP 401(k) calculator.
If she instead contributed 10 percent of her salary each year with the same assumptions, her retirement savings account would total $1,591,000.
“Most people are going to fall well short of their savings goal, so you should always save as much as you can, but at least enough to get the employer match,” said Matt Rutledge, a research economist at the Center for Retirement Research at Boston College. “You don’t want to leave money on the table.”
Many financial professionals recommend retirement savers sock away between 10 percent and 15 percent of their income annually. But that is merely a guideline.
It all depends on the age you start saving, said Rutledge.
“If you start saving early, at around age 20, you can afford to save 10 percent of your salary, but if you wait until age 30 to start saving, you will need to increase your contribution to 15 percent or more because you will have lost some of the power of compounded growth,” he said. “The earlier you start saving, the easier it is to hit your goals.”
Those percentage targets include the employer match, “so it may be a little easier than you think” to save a sufficient amount, said Rutledge.
To estimate how much money you will need to retire comfortably, project your future expenses and calculate your guaranteed sources of income from Social Security, annuities, and any pensions you may have. (Calculator: How much should I save for my retirement?)
The difference is what you will need to generate from personal savings and investments to fund your monthly living expenses.
A 4 percent withdrawal rate from your nest egg, adjusted annually for inflation, is generally considered to be a safe target to ensure that you don’t outlive your retirement savings.
But once again, retirement planning is not one size fits all. You may be able to withdraw more (or less) depending on the amount you have saved, your life expectancy, the return on your investments, and your monthly living expenses.
You may also be able to mitigate the risk of outliving your retirement accounts by purchasing a deferred income annuity, which can act as longevity insurance, said Rutledge.
Such products provide guaranteed income for life starting at a specified point in the future.
Deferred income annuities “make a lot of sense for a lot of people, because you don’t have to worry so much about whether a 4 percent withdrawal rate is right,” said Rutledge. “You can spend your savings a little more freely, because you know that you only need to make your money last until the (annuity) kicks in.” (Related: Closing a retirement gap)
Annuities are generally purchased with after-tax money. There also exists a certain annuity contract that can be purchased with money from a qualified retirement plan. (Related: Understanding QLACs)
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This article was originally published in October 2016. It has been updated.
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1 Internal Revenue Service, “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000,” Nov. 1 2023.
2 Internal Revenue Service, “Retirement Topics – 401(k) and Profit-Sharing Contribution Limits,” Aug. 19, 2024.
3 Internal Revenue Service, “Retirement Topics – 457(b) Contribution Limits,” Aug. 20. 2024.
4 U.S. Department of Labor, “FAQs: Pension-Linked Emergency Savings Accounts," 2024.