The best way to improve your cash flow for 2025, is to increase your retirement contribution. While this sounds counterintuitive, it works.

Contributing to a qualified retirement account can (1) save you money on taxes while getting you (2) closer to your financial goals. To reap those tax benefits, you’ll need to observe contribution, income, and deduction limits set by the Internal Revenue Service (IRS).

To contextualize this, here’s our real-world example. In 2024, my household earned $250,000, which places us in the 24% marginal tax bracket with an effective tax rate of 17.70%. As a married couple, we would owe $39,077 in taxes. However, we invest a maximum of $23,000 into our 401k accounts. This lowers our marginal tax rate to 22% with an effective tax rate of 16.34%. In the second variation, our taxes owed were reduced to $28,562 That’s a tax saving of $10,515. Check out Nerdwallet’s tax estimator for your estimates, https://www.nerdwallet.com/calculator/tax-calculator.

Two important notes to remember. A 401k account is similar to 403b, 457b, and the government’s Thrift Savings Plan (TSP). Contribution limits for employer-based 401k accounts are higher for Traditional (Tax-Deffered) and ROTH (Tax-Free Growth) individual retirement accounts (IRAs). In brief, a 401k tends to carry more benefits than an IRA. The difference in investing is $23,500 vs. $7,000 for 2025.

Here are the speculated contribution and income limits for 2025:

Source: White Coat Investor, The 2025 Retirement Plan Contribution Limits (September 27, 2024)

Table of Contents

Estimated 401k Contribution Limits

Contributing to an employer-based 401k, 403b or 457b retirement plans reduce wages reported on your tax return, thus lowering your taxable income. Since these contribution deductions are typically made per pay period, they also reduce your FICA taxes which can improve your overall take-home pay.

For 2025, these elective contributions are limited to $23,500, an increase of $500 per person.

Workers who are 50 and older can make an additional $7,500 in catch-up contributions (No increase from 2024).

Many employers also match employee retirement contributions, either dollar for dollar or partially. Make sure you pay attention to the vesting period if any. Some vesting periods are as long as 4 years. Quitting too soon, these cash/wealth benefits cancel out.

The total combined 401k contribution including employer-matching funds cannot exceed $70,000—or $77,500 for workers 50-plus. If you aren’t sticking around for the entire time, remember that you can roll over your contributions through various options. Due to changes from the SECURE Act 2.0, Americans over the age of 60-63 gained an extra $4,750. This brings their total combined contribution to $81,250. As can be seen, some of these limits create strategic financial play for households making more than $150,000.

You really can become a 401k millionaire. It’s more common than you think. Even a contribution of $18,000 per year is worth $1,000,000 by year 22. Example 1 (below)

Contribution limits for employer-based 401k accounts are higher than for traditional and Roth individual retirement accounts (IRAs). — **Example 1**: Investing $18,000 annually at 8% for 22 years.

Estimated IRA Contribution Limits

Individual IRA and Roth IRA accounts offer another way to save for retirement.

Your total contributions to traditional or Roth IRAs are limited to $7,000 in 2025—no increase over 2024. The great part is that an investment in an IRA for 30 years at even $6,000 per year is worth a Million (Example 2).

Maybe a million tax-free if you go with the ROTH option.

Taxpayers who are 50 and older can make an additional $1,000 to catch up. No anticipated increase for 2024.

Your IRA contribution should be made using earned income; to that end, your contribution cannot exceed your taxable compensation for the year.

For example, if you earned $3,750 in 2025, your maximum IRA contribution would be $3,750. This is a great opportunity for families to help teens get started with investing by matching their earnings into an IRA. If a teen made $7,000 from working a summer job or internship, you can help them by investing that amount. Sometimes it pays to buy assets early and give them time to grow. Especially, if it’s tax-free.

Bonus Contribution Details if Married

Married couples filing jointly can each make the maximum contribution to an IRA, as long as, their combined income exceeds the amount they’re contributing, even if one spouse doesn’t meet the income requirement. Even a stay-at-home spouse can open an IRA account.

That’s double the effort.

Check out the 7 things you may not know about IRAs.

IRA contribution limits apply to money you put into traditional and Roth IRAs combined. You can split your total contribution between these two types of accounts, but you can’t contribute $7,000 to each.

This part gets a bit tricky, you might need extra help from your CPA or Certified Financial Advisor who understands Taxation and Retirement Accounts. Make sure your professional understands tax location and tax projection at withdrawal too.

It gets super nerdy and Nostradamus-like.

IRA Deduction Limits for 2025

If you participate in a retirement plan at work, such as a 401k, your IRA deduction may be limited based on your income.

But TNFG, You know my savings are nonexistent?

Although you can contribute $7,000 (or $8,000 if you’re 50 or older) to a traditional IRA regardless of how much you make, you may not be able to deduct your contribution on your taxes if your income exceeds IRA thresholds.

Stay posted to the IRS’ official website for phase-out updates. They usually post by mid-November.

For taxpayers who participate in employer-based retirement plans, here are traditional IRA deduction limits for 2025 based on your modified adjusted gross income (MAGI).

What’s a MAGI? Click here Investopedia provides the best information.

ROTH IRA Income Limits for 2025

While you can’t take a tax deduction on a Roth IRA because contributions are made after tax, Roth IRAs have income limits as well: They indicate how much you can contribute to a Roth, if at all, and they apply whether or not you participate in a 401(k).

The Roth IRA contribution limit for 2025 is $7,000.

Which will break first, in 2024-2025, the economy or consumer spending?

Estimated HSA Contribution Limits

The Quadruple tax advantage account aka the Health Saving Account (HSA) offers another way to save for medical expenses and retirement.

Your HSA contributions are limited to $4,300 for singles and $8,550 for families (more than 2) in 2025. Taxpayers who are 50 and older also get an additional $1,000 to catch up. I think HSAs are great for families. This is an amazing tax location tool that yields multiple options when withdrawing later.

Here are more reasons to use an HSA as a retirement tool, 5 ways HSAs can help with your retirement. From the 401k, IRA, and HSA; you have options. In tandem with the other two, you can save as much as $34,650 as a single person or $69,300 as a married couple.

What to Do if You Contribute Too Much to an IRA, 401k, or HSA?

Panic! kidding.

Contributing too much money to your IRA or 401(k) plan could lead to additional tax. Excess contributions and any interest or gains they earn are taxed at 6% per year for each year the money remains in your retirement account.

This tax cannot exceed 6% of the combined value of your IRA accounts at the end of the year.

How to Avoid Paying Tax on Excess Contributions

You can avoid paying the 6% tax by withdrawing excess contributions, along with any earnings they’ve generated, before the due date for individual tax returns. The deadline is April 15, 2026 (tax filing deadline).

Just make sure you are timely. Try to make any request at least a month before the April 15 deadline. No need to wait until the last second.

Contact your 401k plan administrator to request a corrective distribution that includes the excess money you contributed and the interest or appreciation you earned on it.

They should issue an amended W-2 with your distributed funds added to your wages for the year. If you over-contribute to an IRA, follow the same steps with your financial institution.

You should receive Form 1099-R, which shows what you made on your excess contribution so you can add it to your taxable income.

What if You Miss the Deadline?

If you don’t remove your excess contributions before the tax filing deadline, you’ll pay a 6% tax on that money.

And since the 6% penalty tax applies for each year the money remains in your account, you’ll likely pay twice—once for the prior year and again for the current one.

Make the corrective withdrawal quickly to avoid paying another 6% when a new year begins.

Maxing Out Your Retirement Contribution

Maxing out your retirement accounts is sound financial advice, but it does require you to understand annual contribution limits but your HR will remind you annually. Especially when it comes to a 401k, it won’t allow you to over-fund your account.

As long as you meet IRS guidelines, contributing to a 401k, traditional IRA (or Roth IRA), and a Health Savings Account can offer a myriad of tax advantages. These advantages catapult your net worth and Debt to Income ratio. See Table 1 and Table 2.

How much is the growth worth (without the employer’s match)?

Years	Total Contributions	Total Compounded Interest	End Balance
1	$34,650	$1,252.85	$35,903
5	$173,250	$37,378	$210,628
10	$346,500	$173,609	$520,109
15	$519,750	$455,088	$974,838
20	$693,000	$949,985	$1,642,985
25	$866,250	$1,758,461	$2,624,711
30	$1,039,500	$3,027,689	$4,067,190

Table 1. As a single person investing $2,887.50 at the 8% average historical rate of return

Years	Total Contributions	Total Compounded Interest	End Balance
1	$71,805	$2,506	$71,806
5	$346,500	$74,755	$421,255
10	$693,000	$347,218	$1,040,218
15	$1,039,500	$910,176	$1,949,676
20	$1,386,000	$1,899,970	$3,285,970
25	$1,732,500	$3,516,923	$5,249,423
30	$2,079,000	$6,055,380	$8,134,380

Table 2. For a Married Couple investing $5,775 at the 8% average historical rate of return

Even the matching contribution of just $4,500 annually (or $375 monthly) is worth $528,206 in 30 years. We can’t make this up. My 401k grew to $150,000 in 4 years. Don’t sleep on the power of compounding your efforts.

In the game of wealth, every bit of effort counts. Especially since the matching contribution is FREE money for you. Don’t make the mistake of leaving this much cash on the table.

But what about the taxes?

You are indeed correct. There will be taxes. However, it’s all based on your withdrawal rate. Beyond that, it matters if you can live off your hard-earned savings for the rest of your life like a Boss.

I think not. But then again, you earned your dollars. How you spend it is up to you. I rather pay less taxes personally.

Will be updating this post once the final official IRS information is released. So far, the US Bureau of Labor and Statistics shared the 2023 Median Household data. American households grossed $101,805 in 2023 (+8.30 percent from 2022) while spending nearly $77,280 (+5.90 percent). Translation, you likely have the income.

Contrary to popular social media belief, it’s time to manage that cash flow properly. It’s your money and spending impulses. And try not to listen to people who blanketly say 401ks don’t work. Additionally, I’m not arguing with fools. If you have additional questions, please them in the comments section and I’ll address them.