Increase your savings with higher 2025 retirement plan contribution limits

Saving enough each year for retirement is the most important thing you can do towards becoming retirement ready, followed by investing consistently with your life stage and other goals. Not everyone needs to save up to the IRS maximum retirement plan savings limits, but some should save up to the limits (or more, outside of a retirement plan) in order to meet their retirement readiness goals. Most people need to increase their savings to get on track.

Pay yourself first by saving an appropriate amount into your retirement account and avoid being one of many people who are unable to retire when or at the lifestyle they want due to under-saving.

Retirement account savings limits can increase yearly, giving you an opportunity to save more. For 2025, the IRS adjusted contribution limits for 401(k), 403(b), and 457 plan contributions and IRA (Individual Retirement Accounts) are as follows:

 2025 Contribution limits:

• Maximum 401(k), 403(b), 457 plan employee deferral: $23,500 (up $500 from 2024).

• Additional “Catch-up” contributions for those age 50 at the end of the 2025: $7,500 (same as 2024). This is in addition to the $23,500 above. However, see below for those age 60-63.
• New additional “Catch-up” contributions for those age 60-63 at the end of 2025: $11,250. This is instead of the $7,500 catch-up contribution mentioned above.

• Maximum Defined contribution plan total dollar limit: $70,000 (this is the total across all sources, i.e. employee contributions and employer contributions).

• IRA contributions: $7,000. IRA limits are subject to a number of factors, be sure to review the IRS website for details. Depending on your situation, other tax-advantaged savings account types may be available.

• Catch-up IRA contributions (age 50+): $1,000. See the note above regarding possible limitations.
• Depending on your situation, there may be other tax-advantaged ways to save.

For more details, visit the IRS website.

Younger employees are not saving enough, early enough

Research shows that during 2023, only 14% of participants saved the maximum allowed amount for that year. Also, retirement plan participation rates were “lowest for employees younger than 25. Only 58% of younger workers elected to contribute to their employer’s plan, while more than 8 in 10 employees between ages 35 and 64 made such deferrals.”*

Increase your savings through automatic savings increases

Many plans offer an automatic default or optional feature to gradually and automatically increase your savings rate over a number of years. If you aren’t able to make a big jump in savings levels now into your retirement plan, automatically increasing your savings each year by 1-2% or more, can lead to a big impact over time, without needing to remember to make the change yourself each year. If automatic escalation is not already in place for you, contact the customer service group of your retirement plan provider to ask them how to turn it on.

Save at levels consistent with your retirement goals

Deciding how much to increase your savings levels is easier if you have clear retirement goals, as well as other goals such as saving for a down payment or creating an emergency savings account. However, not everyone is clear yet about those goals. Contributing up to the allowable limits may not always be the answer, so here are a few good general rules of thumb to get you started:

1. Always save enough to capture your full company match each year, if a match is offered. A match is free money, and you can’t get that opportunity back after it passes. Also, some plans require that you save the right minimum amount each pay period in order to capture the match, vs. making a bigger contribution during the year.
2. If your retirement goals aren’t clear yet, simply stretch to save as much as you can now, and then adjust that savings level up or down as your retirement goals become clearer. Don’t wait to start saving more later, most pre-retirees wish they had saved more sooner.
3. Generally, people should save at least 10% of their income into their retirement plan yearly, but that may not be enough if you didn’t start saving at an early age, or if you plan to retire early, or may live longer than average, or if you have high spending goals during retirement.
4. Consider the 50/30/20 Needs/Wants/Savings budgeting rule, which suggests spending 50% on needs, 30% on wants, and 20% on savings. Within savings, a portion could be the 10% for retirement savings suggested above, or 15%, plus a combination of savings towards a down payment on a home purchase, emergency savings, a “529” college savings account, and/or other needs.

The risk of delaying retirement savings

Many workers delay retirement savings and then save too little. Delaying savings is a risk for many reasons, especially as you start to earn more. The earlier you start and the more you save, the greater the power of compounded interest. If you wait to save, time works against you, and much larger savings levels will be required later in life to get to the same retirement nest-egg goal… or you may have to work longer and/or spend less in retirement. If you aren’t convinced, ask this simple question to older family members or friends or workers at your company: “Do you wish you had started saving more and earlier into the retirement plan?” The vast majority of people will say yes, and will encourage you to get started saving more and sooner.

*Research from How America Saves 2024, a report by Vanguard.