What Does Maxing Out Your 401k Mean?
Understand the complete scope of allowable contributions to your 401(k) for optimal retirement planning.
“Maxing out” your 401(k) means contributing the maximum allowable amount to your employer-sponsored retirement account each year. This strategy is a significant step towards building a substantial retirement nest egg. It involves understanding specific contribution limits set by federal tax authorities, which can vary based on your age and whether your employer also contributes to your plan. The rules governing these contributions have several nuances.
Understanding Employee Contribution Limits
For employees, “maxing out” refers to reaching the annual elective deferral limit, the amount you can contribute from your paycheck. For 2025, this limit is $23,500. This amount is set by the Internal Revenue Service (IRS) and is subject to change annually to account for inflation. Elective deferrals represent the money an employee chooses to have withheld from their gross pay and directed into their 401(k) account.
Individuals aged 50 and older are eligible to contribute an additional amount, known as catch-up contributions, to their 401(k). For 2025, the standard catch-up contribution is $7,500, allowing eligible employees to contribute a total of $31,000. A special, higher catch-up contribution applies for those aged 60 to 63, increasing to $11,250 in 2025, potentially allowing a total personal contribution of $34,750 for this age group if their plan permits.
Employer Contributions and Overall Limits
Beyond an employee’s personal contributions, employers can also contribute to a 401(k) plan through matching contributions or profit-sharing. Matching contributions involve the company contributing a certain amount, often a percentage of the employee’s contribution, up to a specified limit. Profit-sharing contributions are discretionary amounts employers can add to employee accounts, typically based on the company’s profitability. These employer contributions do not count against the employee’s individual elective deferral limit.
An overall contribution limit for a 401(k) plan encompasses both the employee’s elective deferrals and any employer contributions. For 2025, this combined limit is $70,000, or 100% of the employee’s compensation, whichever is less. The total funds deposited into their 401(k) can be significantly higher due to employer contributions, up to this overall cap. For employees aged 50 and older, including their catch-up contributions, the overall limit can increase to $77,500, or $81,250 for those aged 60-63 who are eligible for the higher catch-up amount.
Reaching Your Contribution Limit
When an employee reaches their annual elective deferral limit, payroll deductions for their 401(k) cease for the remainder of the calendar year. Employers and their payroll systems are designed to track these contributions to ensure compliance with federal limits. For example, if an employee contributes a large percentage of their salary, they might reach the annual limit early.
Once the limit is met, payroll deductions for the 401(k) automatically stop. This can result in a noticeable increase in an employee’s take-home pay for the rest of the year, as no further contributions are withheld for retirement. Contributions usually resume automatically with the first payroll in the new calendar year, resetting with the new annual limits.
Traditional and Roth 401(k) Contributions
The concept of “maxing out” applies equally to both Traditional and Roth 401(k) options. The annual employee elective deferral limit, which is $23,500 for 2025, applies to the combined total of contributions made to either a Traditional or Roth 401(k), or a combination of both. An individual cannot contribute the maximum to a Traditional 401(k) and then contribute the same maximum amount to a Roth 401(k) in the same year; the total across both types is capped at the single limit.
Traditional 401(k) contributions are made on a pre-tax basis, meaning they reduce your taxable income in the year they are made. Withdrawals in retirement are then subject to income tax. In contrast, Roth 401(k) contributions are made with after-tax dollars, providing no immediate tax deduction. However, qualified withdrawals in retirement are entirely tax-free. Despite these differing tax treatments, the dollar amount an employee can contribute to “max out” remains consistent for both Traditional and Roth 401(k) plans.