How Much Super Can I Salary Sacrifice?

Contributing a portion of your pre-tax salary directly into a retirement account, such as a 401(k) or 403(b), is a common strategy to enhance financial security in retirement. This arrangement, known as salary deferral or pre-tax contribution, involves agreeing with your employer to forgo a portion of your gross income. Your employer then contributes that amount directly to your designated retirement plan. This approach can be a tax-efficient way to increase retirement savings because contributions reduce your taxable income in the year they are made.

Understanding Pre-Tax Contribution Limits

Pre-tax contributions to employer-sponsored retirement plans, such as a 401(k), are subject to annual limits set by the Internal Revenue Service (IRS). For 2025, the maximum an employee can contribute to a 401(k) or 403(b) plan is $23,500. This limit applies to the total of your pre-tax and Roth contributions across all such plans, even if you participate in multiple plans with different employers during the year.

Individuals aged 50 and older are eligible to make additional “catch-up” contributions. For 2025, the standard catch-up contribution limit is an additional $7,500. This means if you are age 50 or older, you can contribute up to $31,000 to your 401(k) or 403(b) plan in 2025.

A special enhanced catch-up contribution applies for those aged 60 to 63, provided their plan allows for it. For these specific ages in 2025, the catch-up contribution amount increases to $11,250. This higher limit brings the total possible employee contribution for individuals in this age bracket to $34,750 for the year. Confirm with your plan administrator if your retirement plan has adopted this enhanced catch-up provision.

Beyond your personal contributions, the IRS also sets an overall limit on the total additions that can be made to your defined contribution plan account each year. This limit, known as the Section 415(c) limit, includes your pre-tax contributions, any Roth contributions, employer matching contributions, and any profit-sharing contributions. For 2025, the total combined employee and employer contributions to a 401(k) plan cannot exceed $70,000. If you are age 50 or older and make catch-up contributions, this overall limit increases to $77,500.

Exceeding the annual elective deferral limit can lead to unfavorable tax consequences. If you contribute more than the allowable amount, the excess contributions are included in your gross income for that tax year. You should receive a corrective distribution of the excess amount plus any earnings by April 15 of the following year to avoid double taxation. Failure to address excess contributions can result in them being taxed in both the year of contribution and again upon distribution from the plan.

After-Tax and Roth Contribution Rules

Retirement savers also have options for making contributions with after-tax dollars. These contributions do not reduce your current taxable income, as taxes have already been paid on the money. After-tax contributions fall into two categories: Roth 401(k) contributions and non-Roth after-tax contributions.

Roth 401(k) contributions are made with after-tax dollars, meaning they do not offer an upfront tax deduction. Qualified distributions from a Roth 401(k) in retirement are entirely tax-free, including both contributions and earnings. The annual employee contribution limit for a Roth 401(k) is the same as for a traditional pre-tax 401(k). This combined limit applies to the total you contribute across both traditional and Roth 401(k) accounts.

Some employer-sponsored 401(k) plans also permit non-Roth after-tax contributions. These are separate from your pre-tax or Roth elective deferrals and are made from income on which you have already paid taxes. While earnings on these contributions grow tax-deferred, the earnings portion will be taxed upon withdrawal in retirement. These contributions allow you to save beyond the standard elective deferral limits, up to the overall Section 415(c) limit.

The total amount of all contributions to a defined contribution plan, including your pre-tax, Roth, and any non-Roth after-tax contributions, plus all employer contributions (such as matching and profit-sharing), must not exceed the annual Section 415(c) limit. This limit is $70,000 for 2025, or $77,500 if you are age 50 or older and make catch-up contributions. After-tax contributions allow you to maximize your retirement savings up to this higher overall limit, once your pre-tax and Roth elective deferrals and employer contributions have been accounted for.

If a plan allows it, non-Roth after-tax contributions can be converted to a Roth IRA or a Roth 401(k) through a strategy referred to as a “mega backdoor Roth.” This conversion allows the earnings on those contributions to grow and be distributed tax-free in retirement, provided the Roth IRA or Roth 401(k) distribution rules are met. Not all plans offer the option for non-Roth after-tax contributions or in-plan conversions, so check with your plan administrator. Exceeding the overall Section 415(c) limit can also lead to complications, as excess amounts may need to be returned from the plan or face penalties.

Setting Up a Payroll Deduction Arrangement

Establishing a pre-tax contribution arrangement with your employer requires formal agreement. This arrangement must be set up before you earn the salary that will be directed to your retirement account. Not all employers offer this option, so inquire with your human resources or payroll department.

Once your employer confirms they offer such an arrangement, you will complete a form specifying the amount or percentage of your gross salary you wish to contribute. This agreement formally authorizes your employer to deduct the chosen amount from your paycheck and send it directly to your retirement plan. These contributions reduce your taxable income, resulting in a lower take-home pay but also a lower immediate tax liability.

Regularly review your pay stubs and retirement account statements to verify that the correct amounts are being contributed. This monitoring helps ensure your contributions are on track and that you are not inadvertently exceeding the annual contribution limits. Many retirement plan providers and the IRS offer online tools that can assist you in tracking your contributions throughout the year.

Periodically reviewing and adjusting your contribution amount is a sound financial practice. Life events, changes in income, or updates to IRS contribution limits may warrant modifications to your arrangement. Discussing your options with a financial advisor can provide tailored guidance based on your individual financial situation and retirement goals.