IRS Contribution Limits for 2025

The IRS recently announced new 401(k) and IRA contribution limits for 2025.  Taxpayers can generally contribute up to $23,500 to their 401(k) accounts in 2025.  For those with IRA accounts, taxpayers can contribute up to $7,500 in 2025. 

The IRS also announced the catch-up contribution limits for taxpayers 50 years old and over.  Taxpayers 50-years-old and over can make catch-up 401(k) contributions may increase their contribution by $7,500 to a total of $31,000 for 2025.  Taxpayers who are 60-62 years old may increase their contribution by $11,500 up to a total of $35,000 in 2025.

The IRS also announced new phase-out limits.  Individuals with incomes that exceed certain limits will be limited in what they can contribute to certain retirement plans.   For example, single taxpayers with incomes between $150,000 and $160,000 will not be able to make the full $7,000 contribution to a Roth IRA.  Individuals with incomes over $160,000 generally cannot contribute to Roth IRAs.  Please note there are different phase out limits for different types of retirement plans and you should consult with a financial advisor if you have any questions about phase out limits.

IRAs and 401(k) contributions are tax deferred plans.  This means people who make contributions to 401(k) or IRA accounts can exclude their contribution from income during the current year.  The money in the 401(k) or IRA can grow tax free, and the taxpayer will pay tax when they withdraw the money at retirement.

To give an example, let us say a 30-year-old person earns $100,000 taxable income in 2025.  That person makes a $3,000 IRA or 401(k) contribution in 2025.  That person will have $97,000 taxable income in 2025. ($100,000 taxable income less $3,000 contribution to IRA or 401(k)).  That person will pay tax on the IRA or 401(k) withdrawal when they retire.  Let us say that $3,000 contribution grows to $12,000 in the year 2055 and that person takes a $12,000 withdrawal in 2055.  That person will have $12,000 taxable income in 2055 from the withdrawal. The guiding concept on this is that one’s income and tax bracket will be lower at retirement age then in the year of the contribution, thus making it more tax advantage.

Roth IRAs are distinguished from IRAs and 401(k)s in that they are not tax deferred accounts as they are made with post-tax money.  As such, there is no reduction in tax for Roth IRA contributions; however, there is no taxable income to declare when a taxpayer withdraws funds from their Roth IRA.  If we use the example above and change it to the 30-year-old person making a $3,000 contribution to a Roth IRA, the person will have $100,000 taxable income in 2025.  However, when that person taxes Roth IRAs when they retire, they will not have taxable income from the ROTH IRA withdrawals.

Retirement accounts such as IRAs and 401(k)s are not only helpful in providing the money you will need when you retire, but they have potential tax savings as well.  You should talk to a financial planner or tax advisor about what investment strategies work best for you.

At RJS LAW we help our clients with tax planning, estate planning, and other tax services.  If you are in need of tax planning services or are having any other tax problems, please give us a call at 619-595-1655 for a free consultation. 

Written by Joseph Cole, Esq., LL.M.