The IRS has released Notice 2024-80, announcing the updated contribution and benefit limits for retirement plans and IRAs for the year 2025. These changes reflect annual cost-of-living adjustments (COLA) that are made to ensure the limits keep pace with inflation. If you’re planning for retirement or contributing to your retirement accounts in 2025, it’s important to be aware of these new limits to maximize your retirement savings opportunities.
Here’s a breakdown of the key updates for 2025:
- Defined Benefit Plan Limits (Section 415)
For those participating in a defined benefit plan, the annual benefit limit increases from $275,000 to $280,000. This limit applies to the maximum amount of retirement benefits that can be provided under a qualified defined benefit plan.
- For participants who separated from service before 2025, the limit is calculated by multiplying the participant’s compensation limit (adjusted through 2024) by 1.0262.
- Defined Contribution Plan Limits (Section 415)
The contribution limit for defined contribution plans (such as 401(k)s) increases from $69,000 to $70,000 in 2025.
- Key IRA Contribution Limits
- Elective Deferrals (Section 402(g)): The contribution limit for elective deferrals (which includes contributions to plans like 401(k) and Thrift Savings Plans) rises from $23,000 to $23,500.
- Catch-Up Contributions (Section 414(v)): The catch-up contribution limit for individuals aged 50 and older remains at $7,500. However, for individuals aged 60-63, the catch-up limit increases to $11,250.
- SIMPLE Retirement Plans (Section 408(p)): For SIMPLE retirement accounts and SIMPLE 401(k) plans, the contribution limit increases from $16,000 to $16,500.
- Other Important Changes
- Highly Compensated Employee Threshold (Section 414): The income threshold for determining highly compensated employees increases from $155,000 to $160,000.
- Key Employee Threshold for Top-Heavy Plans (Section 416): The limit for determining key employees in top-heavy plans goes up from $220,000 to $230,000.
- Annual Compensation Limitation (Section 401): The annual compensation limit under sections 401(a)(17) and 404(l) increases from $345,000 to $350,000.
- Adjusted Gross Income (AGI) Limits for IRAs and Retirement Savings Credits
Several income thresholds that impact tax deductions for IRA contributions and retirement savings credits have also been adjusted for 2025:
- Retirement Savings Contributions Credit: The income limits for the Retirement Savings Contributions Credit, which provides tax incentives for lower-income savers, are increased. For married couples filing jointly, the limit rises from $46,000 to $47,500. For individual taxpayers, the limit increases from $23,000 to $23,750.
- IRA Deduction Limits: For active participants in retirement plans, the deduction limit for traditional IRA contributions increases for those filing jointly. The phase-out range for joint filers moves from $123,000-$143,000 to $126,000-$146,000.
- Roth IRA Income Limits: The phase-out range for contributing to a Roth IRA for married couples filing jointly increases from $230,000-$240,000 to $236,000-$246,000. For single filers, the phase-out range moves from $146,000-$161,000 to $150,000-$165,000.
- Changes to Other Retirement-Related Amounts
- Qualified Charitable Distributions: The annual limit for qualified charitable distributions (QCDs) from IRAs increases from $105,000 to $108,000.
- Small Employer Pension Plan Credit (Section 45E): The compensation limitation for employees excluded from the small employer pension plan startup cost credit increases to $105,000.
- Domestic Abuse Victim Distributions: The limit on eligible distributions for victims of domestic abuse from retirement plans increases slightly, from $10,000 to $10,300.
What Do These Changes Mean for You?
These annual cost-of-living adjustments allow for higher retirement savings potential, especially if you are nearing retirement or have reached the age where catch-up contributions apply. By contributing the maximum allowable amounts, you can take full advantage of tax-deferred growth in retirement accounts and optimize your retirement savings.
As you plan for 2025, be sure to adjust your contribution strategy to align with these updated limits. Whether you’re contributing to a 401(k), IRA, SIMPLE plan, or another retirement account, understanding these changes can help you stay on track for your long-term financial goals.
Conclusion
The IRS’s 2025 retirement plan and IRA contribution limits provide a clear picture of how inflation is impacting retirement savings strategies. By understanding these adjustments, you can maximize your contributions and potentially lower your taxable income for the year. As always, it’s a good idea to consult with your Glass Jacobson Wealth Advisor to ensure you are making the most of these limits and optimizing your retirement planning for the year ahead.
