Reached Maximum Contribution for 401(k) in 2025? Here's Some Alternative Strategies
In 2025, individuals seeking to bolster their retirement savings have several options to consider. Here's a breakdown of the contribution limits for popular retirement plans and some strategies to maximise your savings.
Firstly, let's talk about the 401(k) plan, a common workplace savings plan. The maximum contribution limit for employee deferrals in a 401(k) plan is set at $23,500. For those aged 50 and older, an additional catch-up contribution of $7,500 is available, bringing the total combined limit to $77,500.
However, the SECURE 2.0 Act introduces an enhanced catch-up contribution for those aged 60 to 63. This super catch-up contribution allows individuals to contribute an additional $11,250, pushing the total combined limit to $88,750.
For those who wish to contribute even more, deferred annuities offer unlimited contributions with tax-deferred growth and guaranteed returns in fixed annuities.
Another strategy to consider is a backdoor Roth IRA, which involves contributing after-tax dollars to a traditional IRA and converting them to a Roth IRA. High earners may find this strategy beneficial as it allows for additional savings and tax-free growth. However, be aware of the pro-rata rule, which could result in unexpected taxes during the conversion.
Considering a deferred compensation plan can be a good strategy to capitalise on tax-deferred investment growth beyond 401(k) limits.
Meanwhile, mega backdoor Roth contributions can provide larger Roth contributions if an employer's 401(k) plan allows after-tax contributions and in-plan Roth conversions or in-service rollovers.
Lastly, taxable brokerage accounts offer long-term growth and flexibility, with lower tax rates on long-term capital gains and qualified dividends.
Remember, total contributions cannot exceed 100% of the employee's compensation. HSA accounts offer tax-free withdrawals for medical expenses, making them another worthwhile consideration.
As always, consulting a financial advisor can help tailor these strategies to individual goals, tax situations, and risk tolerances. High earners may find it particularly beneficial to prioritise tax-advantaged accounts to reduce current taxable income and secure tax-free growth.
Lastly, after maxing out your 401(k), it's recommended to explore less obvious investment options and consider upcoming life events to make informed decisions. A donor-advised fund (DAF) is another option, offering immediate tax deductions and tax-free growth while supporting charities.
[1] SECURE 2.0 Act of 2022: Increasing Retirement Savings Opportunities for Americans (Congress.gov, 2022) [2] IRS Announces 2025 Contribution and Benefit Limits for Retirement Plans (IRS.gov, 2024) [3] 401(k) Contribution Limits: What You Need to Know for 2025 (Investopedia, 2024)
- In the realm of personal-finance, deferred annuities stand as an option for individuals who wish to invest beyond the 401(k) plan's contribution limits, offering unlimited contributions with tax-deferred growth.
- As you explore options for maximising liquidity in your personal-finance, a strategy like the backdoor Roth IRA, involving after-tax contributions and subsequent conversion to a Roth IRA, could be beneficial for high earners, offering additional savings with tax-free growth.
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