The youngest of the baby boomers and some older Gen 401(k)? Yeah, that’s the mind-blowing maximum that was just released. Of course, they may have to avoid certain trips to the supermarket, put aside plans to go out for a walk, and avoid sports betting or compulsive online shopping to achieve this.
Why are we suddenly talking about such high numbers? It is because starting next year a new hyper-concentrated recovery limit will come into force, thanks to a little-known change made to the SECURE 2.0 law. Major revisions to retirement savings rules were included in SECURE 2.0, which President Joe Biden signed into law in late 2022 as part of an overall $1.7 trillion spending package.
New plan to increase retirement savings 401K
Those who are close to reaching retirement might be happy to know that they have a way to put even more money in their savings.A substantially higher “catch-up” contribution for 401(k) plans applies to those who saved and are now ages 60, 61, 62, and 63 participating in these plans at work beginning in 2025. For example, If someone is 59 in March but turns 60 in September 2025, according to the IRS, they could contribute up to a maximum of $34,750 into a plan 401(k) in 2025.
For 2025, the highest catch-up contribution limit that applies to this age group is $11,250. That’s $3,750, in addition to the regular recovery limit of $7,500, which begins in the year a person turns 50. Catch-up contributions for those aged 50 and over have long been a way for some who can save more to get an extra boost in their later working years. We’re talking about people who participate in most government 401(k), 403(b), 457 plans, and the federal government’s Retirement Savings Plan.
Is there a penalty for over-contributing to a 401(k) in 2025?
The annual employee contribution limit for 401(k) plans will increase to $23,500 in 2025, up from $23,000 in 2024. The catch-up contribution limit for employees aged 50 and over will remain at $7,500 for 2025, allowing those 50+ to contribute up to a total of $31,000.
A new, higher catch-up contribution limit of $11,250 will apply to employees aged 60–63 in 2025, enabling them to contribute up to a total of $34,750. If you contribute more than these annual limits, the excess amount is classified as an “excess deferral.”
- Excess deferrals are included in your gross income for the year they occur and may incur additional taxes if not withdrawn by April 15 of the following year.
- To avoid penalties, notify your plan administrator of the excess deferral and request a refund by April 15. The excess amount will be taxed as ordinary income.
- If you fail to withdraw excess deferrals by the deadline, the amount will be taxed twice: once in the year contributed and again when distributed by the plan.
For individuals under age 59½, an additional 10% early withdrawal penalty may apply to the excess deferral if it is not properly addressed.
How does SECURE 2.0 affect self-employed individuals or freelancers regarding 401(k) contributions?
Increased Contribution Limits:
The contribution limits for solo 401(k) plans are rising in 2024. Self-employed individuals can contribute up to $23,000 as an employee deferral (or $30,500 if aged 50+). The total contribution limit, including employer contributions, will increase to $69,000 (or $76,500 for those aged 50+).
Roth Solo 401(k) Option:
Thanks to the SECURE 2.0 Act, solo 401(k) plans can now include Roth contributions. This allows self-employed individuals to make after-tax contributions that grow tax-free, providing greater tax diversification in retirement.
Tax Credits for New Plans:
For solo 401(k) plans established after 2023, self-employed individuals may qualify for enhanced tax credits to offset startup costs. The credit now covers 100% of administrative costs up to $5,000. Additional credits may apply based on contributions made for employees.
Relaxed Eligibility Rules:
Starting in 2024, solo 401(k) plans can exclude employees who are under age 21 or work fewer than 500 hours per year. This flexibility allows businesses with part-time workers to continue using solo 401(k) plans.
Emergency Savings Accounts:
Beginning in 2024, solo 401(k) plans can include an emergency savings account option. Contributions are capped at $2,500 per year and treated as Roth contributions, offering penalty-free access to funds for short-term needs.
Everything you need to know about 401(k) savings limits
In early November, the Internal Revenue Service (IRS) implemented new updated limits for beneficiaries for retirement in 2025. According to the IRS announcement, individuals can contribute up to $23,500 to their 401(k) plans for the year 2025, which is $500 more than the 2024 limit. This increase applies to both younger people and older workers.
Catch-up contributions allow you to save beyond that initial limit, if you qualify. There are maximum catch-up contributions of $7,500 for one group of older workers and $11,250 for another. Thus, the total contribution allowed in a 401(k) plan is $34,750 for those aged 60 to 63 in 2025, and $31,000 for employees aged 50 to 59 or over 64. This new, permanent rule can be a little confusing for some.