The Internal Revenue Service (IRS) has unveiled updated contribution limits for 401(k) plans, individual retirement accounts (IRAs), and Roth IRAs for 2025, reflecting cost-of-living adjustments aimed at helping Americans manage savings amid persistent inflation. The new limits allow for increased contributions to workplace retirement plans and establish new income thresholds for tax-advantaged retirement savings.
Starting in 2025, the employee contribution limit for 401(k), 403(b), and most 457 plans, along with the federal Thrift Savings Plan, will rise to $23,500-up from the 2024 limit of $23,000, according to the IRS announcement on Friday. The boost in deferral limits aligns with the agency's annual inflation adjustments, which this year also include higher federal tax brackets and a larger standard deduction.
For individuals aged 50 and above, the 401(k) catch-up contribution remains at $7,500. However, those aged 60 to 63 are now permitted an even larger catch-up contribution of $11,250, based on provisions in the Secure 2.0 Act enacted in 2022. This increase allows near-retirement savers additional options to bolster retirement accounts in the years closest to retirement.
"Catch-up contributions provide a critical opportunity for older workers to maximize retirement savings as they near retirement," said an IRS spokesperson in a statement. These adjustments follow trends in savings behavior, as only 14% of U.S. employees deferred the maximum amount in 401(k) accounts in 2023, according to Vanguard's 2024 How America Saves report. Vanguard found that average employee deferrals were around 7.4%, with total contributions, including employer matches, averaging 11.7%.
For individual retirement accounts (IRAs), the contribution limit will remain $7,000, with a catch-up limit of $1,000 for savers over 50. While these limits are unchanged from 2024, the IRS made notable adjustments to income thresholds for Roth IRAs. For single filers and heads of household, the income phase-out range for Roth IRA contributions will now be between $150,000 and $165,000, up from $146,000 to $161,000 in 2024. Individuals in this bracket may make partial Roth contributions, while those below the threshold may contribute the full amount.
For married couples filing jointly, the Roth IRA income phase-out range has increased to between $236,000 and $246,000, up from $230,000 to $240,000 in the previous year. This range determines eligibility for full or partial contributions, providing more flexibility for higher earners. However, the phase-out range for married individuals filing separately remains unchanged at $0 to $10,000, as it is not subject to annual cost-of-living adjustments.
The IRS also recently raised the standard deduction for 2025, which will now be $15,000 for single filers and married individuals filing separately-a $400 increase from 2024. Joint filers will see their standard deduction rise by $800, to $30,000, while heads of household will have a $22,500 deduction, up by $600. These adjustments will reduce taxable income for many households, aligning with the IRS's efforts to address the impacts of inflation on family budgets.
In addition to these retirement-related updates, federal income tax brackets have shifted upward to accommodate inflation. Higher income limits are also now in place for capital gains brackets, the estate and gift tax exemption, and eligibility for the earned income tax credit (EITC), providing relief to households in various income groups.
The Social Security Administration recently echoed the IRS's inflation-driven changes by announcing a 2.5% cost-of-living adjustment for benefits in 2025, which will mean a monthly increase of over $50 for most recipients. This adjustment marks a smaller increase than in previous years, reflecting a more modest inflation forecast but nonetheless providing additional income to retirees and others on Social Security.
While these contribution limits and tax adjustments reflect broader economic conditions, they also encourage retirement savings. Financial advisors suggest that maximizing contributions, where possible, can be a beneficial strategy for long-term financial stability. "Even a small increase in contribution amounts can significantly impact retirement readiness," said Maria Bruno, head of U.S. wealth planning research at Vanguard.
