Do Traditional 401k Income Limits Exist?

A traditional 401k is an employer-sponsored retirement plan where employees make pre-tax contributions. This lowers your annual taxable income, and the investments grow tax-deferred until retirement. Understanding the distinction between contribution limits, which are based on a set dollar amount, and other income-related rules is fundamental for effective retirement planning.

Annual Contribution Limits

The Internal Revenue Service (IRS) establishes specific dollar amount limits for how much an employee can contribute to their 401k each year. For 2025, the elective deferral limit, which is the maximum amount an employee can contribute from their salary, is $23,500. This cap applies to your total contributions across all 401k plans.

To help individuals nearing retirement age save more, the tax code allows for catch-up contributions. Savers aged 50 and over can contribute an additional $7,500 for 2025, allowing eligible employees to contribute a total of $31,000. A new provision starting in 2025 allows those aged 60, 61, 62, and 63 to make an even larger catch-up contribution of $11,250, if their plan allows for it.

There is also an overall limit that includes all contributions to your account, which covers your own deferrals, any employer matching funds, and other employer contributions. For 2025, this total limit is $70,000, or 100% of your compensation, whichever is less. This overall cap ensures that the total annual additions to a participant’s account remain within a specified boundary.

The Myth of Income Limits for Contributions

A frequent point of confusion for savers is whether their income level affects their ability to contribute to a traditional 401k. The IRS does not impose any income caps that restrict an individual’s eligibility to make contributions to a traditional 401k plan. Regardless of whether you earn a modest salary or a high income, you are permitted to contribute up to the annual elective deferral limit.

This misunderstanding often arises from the rules associated with other types of retirement accounts, most notably Roth Individual Retirement Arrangements (IRAs). Roth IRAs have strict Modified Adjusted Gross Income (MAGI) phase-out ranges that determine if you can contribute. For example, in 2025, a single filer’s ability to contribute to a Roth IRA is reduced if their MAGI is between $150,000 and $165,000, and eliminated entirely above that range.

Highly Compensated Employee Status and Its Impact

While the IRS does not set a direct income limit for 401k contributions, a high salary can indirectly affect how much you can save. This occurs through non-discrimination testing, which ensures a company’s 401k plan does not disproportionately benefit high earners. These rules designate certain individuals as a “Highly Compensated Employee” (HCE).

An employee is classified as an HCE for the current year if they meet one of two criteria in the preceding year. The first is an ownership test: anyone who owned more than 5% of the business is an HCE. The second is a compensation test: for 2025 testing, an employee who earned more than $155,000 in 2024 is considered an HCE.

Each year, most 401k plans must pass tests that compare the average contribution rates of HCEs with those of non-HCEs. If the plan fails this testing because the HCEs are contributing at a significantly higher rate, the plan must take corrective action. This often means that some HCEs will receive a refund of a portion of their 401k contributions.

This refund, known as a corrective distribution, is treated as taxable income in the year it is received, negating the pre-tax benefit. In some cases, the plan administrator may proactively cap the contribution percentage for HCEs in the following year to ensure the plan passes the test. Being an HCE does not prevent you from participating, but it can lead to a plan-specific limit on your contributions that is lower than the official IRS maximum.

Income Limits for Deducting IRA Contributions When You Have a 401k

Confusion also arises from the rules for Traditional IRAs. These income limits determine if you can deduct Traditional IRA contributions when you are covered by a workplace retirement plan, like a 401k. Being “covered” means you are eligible to participate in your employer’s plan, regardless of whether you actually contribute.

The ability to deduct Traditional IRA contributions is phased out based on your Modified Adjusted Gross Income (MAGI). For 2025, a single individual covered by a workplace plan will see their deduction phased out with a MAGI between $79,000 and $89,000. For those who are married and filing jointly, where the spouse making the IRA contribution is covered by a workplace plan, the deduction phase-out range is a MAGI between $126,000 and $146,000.

If you are not covered by a workplace plan but your spouse is, the rules are more generous. In this scenario for 2025, the IRA deduction for the non-covered spouse phases out with a joint MAGI between $236,000 and $246,000.