Hey everyone! Are you maxing out your 401k contribution every year? This is an excellent strategy for retirement savings. While retirement may seem far off, it will arrive sooner than you think. Maxing out your 401k is one of the simplest paths to becoming a millionaire. The contributions are automatic, and after a few months, you won’t even notice the difference in your paycheck.
The maximum contribution limit for 401k plans typically increases every few years, but 2025 brings a notable change. Congress has introduced a new category for workers aged 60 to 63. Here’s a breakdown of the contribution limits for 2025:
- Under age 50: $23,500
- Ages 50-59: $23,500 (standard deferral) + $7,500 (catch-up) = $31,000
- Ages 60-63: $23,500 (standard deferral) + $11,250 (enhanced catch-up) = $34,750
- Age 64 and over: $23,500 (standard deferral) + $7,500 (catch-up) = $31,000
That’s a significant amount to save! Contributions to a traditional 401k are tax-deferred, meaning you won’t pay taxes on that money until you withdraw it. This is a substantial advantage, especially for older workers. However, another significant change is on the horizon for 2026.
Roth 401k
Many employers now provide a Roth 401k option. If available, you can choose to contribute to either a traditional 401k (pre-tax) or a Roth 401k (post-tax). With the Roth 401k, you pay taxes upfront, but your withdrawals will be tax-free. Both options are beneficial, and having a mix of traditional and Roth accounts can enhance your tax strategy in the long run.
Catch-up Contribution Changes for 2026
Starting next year, if your income exceeds $145,000 in 2025, all catch-up contributions must be made to the Roth 401k. This shift indicates a preference for immediate taxation rather than deferring it. While this may seem inconvenient, it can actually enhance your tax diversity. Many older workers have a larger balance in their traditional accounts due to historical contribution limits on Roth accounts.
For instance, my retirement portfolio consists of about 75% traditional and 25% Roth, which I consider a healthy balance.
Here’s the key change for 2026:
- Catch-up contributions must be made to the Roth 401k if your income was over $145,000 in the previous year.
However, there’s an important caveat: employers are not obligated to offer the Roth 401k option. If your employer doesn’t provide this option, you won’t be able to make catch-up contributions if your income exceeds $145,000. It’s wise to check your 401k plan now if you fall into this category.
Retirement Savings
My best advice for younger workers is to start maxing out your 401k contributions as soon as possible. Begin by contributing 10% of your income and aim to increase that percentage annually. Once you consistently max out your contributions, your retirement savings will grow rapidly, and compound interest will work in your favor.
Are you maxing out your 401k contributions? Both traditional and Roth 401k options are excellent choices. Keep investing!
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