401k Phase Out: Are Your Contributions Limited by Income?

The term “phase-out” in retirement savings describes how rising income can reduce or eliminate certain tax benefits. Many savers worry about a “401k phase-out,” assuming their ability to contribute is limited by their salary. This article clarifies how income affects contributions to 401k plans versus Individual Retirement Arrangements (IRAs), including indirect rules that can impact high earners.

Direct 401k Contribution Limits

Contrary to a common misconception, the Internal Revenue Service (IRS) does not impose income restrictions on an employee’s personal contributions to a 401k plan. There is no income-based phase-out that prevents you from making these elective deferrals. Any eligible employee can contribute up to the annual limit, regardless of their earnings, as long as their compensation can cover the contributions.

The IRS sets a firm dollar cap on employee contributions that is adjusted for inflation. For 2025, an employee can contribute up to $23,500 to their 401k. This limit applies to the total of all elective deferrals, including both traditional pre-tax and Roth 401k contributions.

The IRS allows for “catch-up” contributions for individuals age 50 and over. For 2025, this additional amount is $7,500, allowing a total contribution of $31,000. A provision starting in 2025 also allows those aged 60 through 63 to make a larger catch-up contribution of $11,250, if their plan allows it.

Income Phase-Outs for IRA Contributions

The income limitations many people associate with 401k plans actually apply to Individual Retirement Arrangements (IRAs). These rules are based on your Modified Adjusted Gross Income (MAGI), which is your household’s adjusted gross income with certain deductions added back. Your MAGI and filing status determine if your ability to deduct Traditional IRA contributions or contribute to a Roth IRA is phased out.

A phase-out concerns the tax deduction for contributions to a Traditional IRA. If you or your spouse are covered by a retirement plan at work, like a 401k, your ability to deduct these contributions is limited by your income. For 2025, the deduction for a single filer with a workplace plan phases out with a MAGI between $79,000 and $89,000. For married couples filing jointly where the contributing spouse is covered, the phase-out range is $126,000 to $146,000.

A more restrictive phase-out applies to direct contributions to a Roth IRA. For 2025, a single filer’s ability to contribute is reduced if their MAGI is between $150,000 and $165,000 and is eliminated above that range. For married couples filing jointly, the phase-out range is between $236,000 and $246,000. If your income falls within these ranges, you can make a partial contribution; if it exceeds the upper limit, you cannot contribute.

| 2025 Traditional IRA Deduction Phase-Outs (With Workplace Plan) |
| :— | :— |
| Filing Status | Modified AGI Range |
| Single / Head of Household | $79,000 – $89,000 |
| Married Filing Jointly | $126,000 – $146,000 |
| Married Filing Separately | $0 – $10,000 |

| 2025 Roth IRA Contribution Phase-Outs |
| :— | :— |
| Filing Status | Modified AGI Range |
| Single / Head of Household | $150,000 – $165,000 |
| Married Filing Jointly | $236,000 – $246,000 |
| Married Filing Separately | $0 – $10,000 |

The Highly Compensated Employee Rule

A high salary can indirectly limit your 401k savings through rules designed to ensure plans benefit all employees fairly. These regulations define a Highly Compensated Employee (HCE). The IRS classifies an employee as an HCE if they meet either an ownership or a compensation test. The ownership test is met if the individual owned more than 5% of the business in the current or preceding year.

The compensation test is met if an employee’s pay in the preceding year exceeded a specific threshold. For determining HCE status in 2025, the compensation threshold is $155,000 earned in 2024. An employer can also choose to limit this group to only the top 20% of employees by pay.

To maintain their tax-qualified status, 401k plans must undergo annual nondiscrimination testing. These tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, compare the contribution rates of HCEs to those of non-highly compensated employees (NHCEs). This ensures the plan does not disproportionately favor high earners.

If a plan fails this testing because HCEs contributed at a much higher rate than NHCEs, the company must take corrective action. The most common solution is to refund a portion of the contributions made by HCEs. This refund lowers their contribution rate to a level that allows the plan to pass the test, reducing their total retirement savings for the year.

Alternative Retirement Savings Strategies

For savers whose contributions are limited by IRA phase-outs or HCE rules, several strategies can help maximize retirement savings.

A popular strategy for those affected by Roth IRA income limits is the Backdoor Roth IRA. This process involves making a non-deductible contribution to a Traditional IRA and then promptly converting that amount to a Roth IRA. This two-step maneuver allows high-income earners to fund a Roth account. The annual contribution is still subject to the IRA limit of $7,000 for 2025 ($8,000 if age 50 or older), and you must file IRS Form 8606 to report the transaction.

The Mega Backdoor Roth IRA is available to individuals whose 401k plan allows for after-tax contributions, which are different from Roth 401k contributions. After making the maximum employee contribution ($23,500 in 2025), this strategy allows you to contribute additional after-tax money up to the overall IRS limit for total 401k additions ($70,000 in 2025). These after-tax contributions can then be converted to a Roth 401k or rolled over to a Roth IRA.

If these retirement-specific strategies are not available, investing through a standard taxable brokerage account is another option. While it lacks the tax advantages of a 401k or IRA, it provides unlimited contribution potential and liquidity. This approach can supplement savings for those who have maxed out other tax-advantaged accounts.