Max 401k Deduction and Contribution Limits

The Internal Revenue Service (IRS) establishes annual limits on 401k contributions. Understanding these figures is important for maximizing retirement savings and managing annual tax obligations. These regulations are subject to periodic adjustments for inflation and legislative changes, requiring savers to stay informed.

Core 401k Contribution Limits

The primary limit on personal 401k savings is the employee elective deferral limit, which is the maximum amount an individual can contribute from their salary in a year. For 2025, the IRS has set this limit at $23,500. This cap applies to the combined total of an employee’s pre-tax and Roth 401k contributions.

The tax code allows for catch-up contributions for individuals aged 50 and over to help them increase their savings. For 2025, this additional amount is $7,500, permitting a total contribution of $31,000 ($23,500 + $7,500). 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.

A separate, higher limit governs the total annual additions to a 401k account. Known as the overall contribution limit, or Section 415 limit, this cap for 2025 is $70,000. This figure includes an individual’s own elective deferrals, any employer matching contributions, employer profit-sharing, and allocations of plan forfeitures. Catch-up contributions for those 50 and over are added on top of this limit, allowing for a potential total of $77,500.

For example, an employee under age 50 who contributes the maximum $23,500 to their 401k in 2025 could also receive an employer match of $10,000 and a profit-sharing contribution of $5,000. The total annual addition to the account would be $38,500, which is below the $70,000 overall limit.

Tax Implications of Contribution Types

Contributions to a traditional 401k are made on a pre-tax basis. This means the contributed amount is subtracted from an employee’s gross income before taxes are calculated, resulting in a lower taxable income and an immediate tax deduction for that year.

Conversely, contributions to a Roth 401k are made with post-tax dollars, so there is no upfront tax deduction. The benefit of this approach is realized in retirement, as qualified withdrawals from a Roth 401k are completely tax-free.

The annual elective deferral limit is a single, combined cap for both traditional and Roth 401k contributions. An employee cannot contribute the maximum to both types of accounts in the same year but can split contributions between the two, as long as the total does not exceed the annual limit.

For instance, an employee under age 50 could contribute $15,000 to a traditional 401k and $8,500 to a Roth 401k in 2025. This approach provides a partial tax deduction now while also building a source of tax-free income for retirement. The decision on how to allocate contributions depends on an individual’s current and expected future income.

Contribution Rules for Specific Scenarios

One specific circumstance involves regulations for Highly Compensated Employees (HCEs). The IRS defines an HCE for 2025 plan years based on 2024 compensation of more than $155,000 or if the employee owned more than 5% of the business in either the current or preceding year.

To prevent plans from disproportionately benefiting high earners, 401k plans must undergo annual non-discrimination testing. The Actual Deferral Percentage (ADP) test compares the average contribution rates of HCEs to non-HCEs. If a plan fails this test, HCEs may have their contributions refunded or reclassified, lowering their personal contribution maximum below the standard limit.

Another scenario involves individuals contributing to more than one 401k plan during the year, such as when changing jobs. The employee elective deferral and catch-up contribution limits are applied on a per-individual basis, not a per-plan basis. This means the total amount an individual contributes across all their 401k plans cannot exceed their single, personal limit.

For example, if an employee under 50 contributes $15,000 to a 401k at their first job, they can only contribute an additional $8,500 to a new 401k plan that year. It is the employee’s responsibility to track contributions across all sources to avoid over-contributing, which can lead to penalties and tax complications if not corrected.

Solo 401k Plans for the Self-Employed

Self-employed individuals and small business owners with no employees other than a spouse can use a Solo 401k. This plan structure allows the individual to contribute in two capacities: as the “employee” and as the “employer.” This dual role increases the potential contribution amount.

As the “employee,” the self-employed individual can make elective deferrals up to 100% of their compensation, capped at the standard annual limit, plus any applicable catch-up contribution. This portion of the contribution functions like a standard employee’s contribution, allowing for either pre-tax or Roth treatment if the plan document permits.

The second part of the contribution comes from the “employer” side. As the business owner, the individual can make a profit-sharing contribution to the plan. This employer contribution is limited to 25% of compensation for an incorporated business or approximately 20% of net adjusted self-employment income for an unincorporated business.

The combination of these two contributions cannot exceed the overall annual limit. For example, a 40-year-old consultant with $100,000 in net self-employment income could contribute $23,500 as the “employee.” As the “employer,” they could then contribute about 20% of their adjusted income, as long as the total remains at or below the overall cap.