Retirement plan dollar limits and tax-related thresholds for a variety of program types in 2025 include an increase to $23,500 (from $23,000 in 2024) on the popular tax exclusion for elective wage deferrals to fund traditional tax code section 401(k), 403(b), and 457(e)(15) plans.
According to the November 1 information release from the Internal Revenue Service (IR-2024-85), while the SECURE 2.0 Act of 2022 changed the “catch-up” contribution those age 50 and over can add beyond the $23,500 from a set amount to include an annual cost-of-living adjustment (COLA), the additional deferral allowed remains at $7,500 for 2025.
The SECURE 2.0 Act also added a significant payroll-related wrinkle that applies only to those who attain age 60, 61, 62, or 63 in 2025, however, adjusting the catch-up contribution limitation for those employees under some plans to $11,250 in 2025.
Several Options to Save
Tax code Section 401(k) is one of a plethora of retirement benefit plan arrangements carved out that provide tax advantages for employee and employer contributions. Generally, a traditional 401(k) plan arrangement is set up by an employer and allows tax-free contributions into funds that are traded publicly and subject to stock market changes.
Under these plans, employers often contribute amounts directly on behalf of participating employees, and employees also must contribute via payroll deductions. For income taxation, depending upon the type of arrangement, those amounts can be “tax-deferred” or free of income tax until the employee draws on amounts once they are eligible to collect at retirement (or, under other, special hardship circumstances).
The funds can continue to grow tax-free, but once disbursements from a plan are received, individuals are taxed on the total amount contributed and any gains at the time of payment. The theory behind deferring tax is that, by the time individuals tap into their funds, they would likely be taxed at a lower rate since they no longer earn income from employment.
On the other hand, growing in popularity are so-called “Roth” plans under which individuals choose to have amounts taxed at the time of contribution to the plan instead of deferred. Once eligible to receive payments, since taxes already were paid at the time contributions were made, these individuals generally are not taxed on those amounts withdrawn.
Depending upon the plans offered by employers, employees can apportion some of their contributions as tax-free, some as taxed under a Roth-type plan, and even change their previously tax-deferred arrangement to a Roth-type arrangement.
Details in a Notice
Notice 2024-80, also released on November 1, contains the details of the retirement plan changes announced by the IRS.
The maximum total amount in 2025 that can be contributed to these plans by the employer and employee is rising to $70,000 (from $69,000 in 2024), with certain wage and plan eligibility restrictions.
The Roth catch-up wage threshold for 2024, used to determine whether an individual’s catch-up to an applicable employer plan (other than a plan described in section 408(k) or (p)) for 2025 must be designated Roth contributions, remains $145,000 for 2025.
Also adjusted are income-level phaseouts designed to limit the tax-advantaged retirement plan benefits for those in higher income levels. The definition of “highly compensated employee” is to rise from $155,000 to $160,000, for example.
The definition of a “control employee” under specific sections of the tax code for fringe benefit valuation purposes is to increase to $140,000 in 2025 (from $135,000 in 2024).
The threshold concerning the definition of “key employee” for top-heavy plan purposes will go up from $220,000 in 2024 to $230,000 in 2025, according to the notice. The annual compensation limitation under several types of plans is to increase from $345,000 to $350,000.
Many other figures impacting retirement plan arrangements for self-employed individuals were included in the notice. For example, the 2025 tax-free maximum for contributions to individual retirement accounts remains at $7,000, and the IRA catch-up also is unchanged from the $1,000 additional allowed in 2024.
Payroll and retirement plan administrators generally need to work to adjust systems by January 1 to account for the COLA changes so accurate deductions and contributions are made and accrued for the calendar year and the plans continue to qualify for special tax treatment.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.
Retirement plan dollar limits and tax-related thresholds for a variety of program types in 2025 include an increase to $23,500 (from $23,000 in 2024) on the popular tax exclusion for elective wage deferrals to fund traditional tax code section 401(k), 403(b), and 457(e)(15) plans.
According to the November 1 information release from the Internal Revenue Service (IR-2024-85), while the SECURE 2.0 Act of 2022 changed the “catch-up” contribution those age 50 and over can add beyond the $23,500 from a set amount to include an annual cost-of-living adjustment (COLA), the additional deferral allowed remains at $7,500 for 2025.
The SECURE 2.0 Act also added a significant payroll-related wrinkle that applies only to those who attain age 60, 61, 62, or 63 in 2025, however, adjusting the catch-up contribution limitation for those employees under some plans to $11,250 in 2025.
Several Options to Save
Tax code Section 401(k) is one of a plethora of retirement benefit plan arrangements carved out that provide tax advantages for employee and employer contributions. Generally, a traditional 401(k) plan arrangement is set up by an employer and allows tax-free contributions into funds that are traded publicly and subject to stock market changes.
Under these plans, employers often contribute amounts directly on behalf of participating employees, and employees also must contribute via payroll deductions. For income taxation, depending upon the type of arrangement, those amounts can be “tax-deferred” or free of income tax until the employee draws on amounts once they are eligible to collect at retirement (or, under other, special hardship circumstances).
The funds can continue to grow tax-free, but once disbursements from a plan are received, individuals are taxed on the total amount contributed and any gains at the time of payment. The theory behind deferring tax is that, by the time individuals tap into their funds, they would likely be taxed at a lower rate since they no longer earn income from employment.
On the other hand, growing in popularity are so-called “Roth” plans under which individuals choose to have amounts taxed at the time of contribution to the plan instead of deferred. Once eligible to receive payments, since taxes already were paid at the time contributions were made, these individuals generally are not taxed on those amounts withdrawn.
Depending upon the plans offered by employers, employees can apportion some of their contributions as tax-free, some as taxed under a Roth-type plan, and even change their previously tax-deferred arrangement to a Roth-type arrangement.
Details in a Notice
Notice 2024-80, also released on November 1, contains the details of the retirement plan changes announced by the IRS.
The maximum total amount in 2025 that can be contributed to these plans by the employer and employee is rising to $70,000 (from $69,000 in 2024), with certain wage and plan eligibility restrictions.
The Roth catch-up wage threshold for 2024, used to determine whether an individual’s catch-up to an applicable employer plan (other than a plan described in section 408(k) or (p)) for 2025 must be designated Roth contributions, remains $145,000 for 2025.
Also adjusted are income-level phaseouts designed to limit the tax-advantaged retirement plan benefits for those in higher income levels. The definition of “highly compensated employee” is to rise from $155,000 to $160,000, for example.
The definition of a “control employee” under specific sections of the tax code for fringe benefit valuation purposes is to increase to $140,000 in 2025 (from $135,000 in 2024).
The threshold concerning the definition of “key employee” for top-heavy plan purposes will go up from $220,000 in 2024 to $230,000 in 2025, according to the notice. The annual compensation limitation under several types of plans is to increase from $345,000 to $350,000.
Many other figures impacting retirement plan arrangements for self-employed individuals were included in the notice. For example, the 2025 tax-free maximum for contributions to individual retirement accounts remains at $7,000, and the IRA catch-up also is unchanged from the $1,000 additional allowed in 2024.
Payroll and retirement plan administrators generally need to work to adjust systems by January 1 to account for the COLA changes so accurate deductions and contributions are made and accrued for the calendar year and the plans continue to qualify for special tax treatment.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.