By Chris Gelfuso-Uplevel Business Services

The Internal Revenue Service announced earlier this month that the amount individuals can contribute to their 401(k) plans in 2025 has increased to $23,500, up from $23,000 for 2024. 

If you are aged 50 or older, you can contribute up to an additional $7,500 which means you can contribute a total of $31,000 through payroll deferrals from your wages at work. This can provide significant tax savings as the amount contributed is pre-tax. 

If your income tax rate is 25%, you would save $7,750 in taxes when you file your 2025 tax return if you contributed the full amount allowed for those 50 and older. This tax savings scenario does not apply to contributions to a ROTH 401(k) since those are after tax.

The limit on annual contributions to an IRA remains $7,000. The IRA catch-up contribution limit for individuals aged 50 and over remains $1,000 for 2025. 

Following the same example above, if you contributed the max of $8k to a Traditional IRA, your tax savings would be $2k. This tax savings scenario does not apply to a ROTH IRA.

If you are wondering how these changes would affect your particular situation, or if you would like to open an IRA, please give me a call at (562) 259-7777. We can discuss both Traditional and ROTH options to assess if the tax savings would be more beneficial now or when you retire since when you take out money from a ROTH account after retirement age, the money is tax free but you would pay tax on any distributions from a Traditional IRA or 401(k).