Contribution limit

Each year, the IRS issues a contribution limit for 401(k) plans, which is the maximum amount of money that can be deposited in a given year. For instance, in 2025, the personal contribution limit is $23,500 (up from $23,000 in 2024). This cap ensures fairness in retirement savings and helps guide how much you can squirrel away into your retirement account each year. It’s essentially the maximum allowed personal investment into your 401(k) for tax purposes. See also: 402(g)

What is a 401(k) Contribution Limit in Practice?

A 401(k) contribution limit represents the highest amount an employee is permitted to contribute to their 401(k) retirement plan during a calendar year. This specific ceiling is determined and announced annually by the Internal Revenue Service (IRS), and it can adjust from year to year based on economic factors. 

This limit primarily applies to your own contributions—the amounts you elect to have deducted directly from your paycheck. This figure does not typically include any contributions your employer makes on your behalf, such as matching contributions or profit-sharing, which fall under separate, higher overall plan limits. It’s also good to know that rollover contributions do not count towards any plan limit.

Why do contribution limits exist?

These limits are primarily put in place by the IRS to ensure a level playing field for retirement savings across different income brackets. They help manage the significant tax benefits associated with 401(k) plans, preventing a scenario where only high-income earners could disproportionately benefit from these tax advantages. Ultimately, contribution limits are a core component of the broader tax regulations that govern all qualified retirement plans in the United States, designed to promote widespread savings while maintaining fiscal responsibility within the tax system.

How does the contribution limit Affect Your 401(k) Savings Strategy?

Understanding the annual 401(k) contribution limit is crucial for effectively planning your retirement savings. The most direct impact is that you simply cannot contribute more than the set maximum from your own earnings in a single year. If you reach this ceiling, you cannot put any more into your 401(k) for that specific year. Knowing this limit allows you to strategically plan how much you want to save each pay period to maximize your retirement contributions without exceeding the IRS's regulations. 

For those aged 50 and older in the calendar year, there's a special provision called "catch-up" contributions. For 2025, the standard catch-up contribution limit for most 401(k) plans remains $7,500. Additionally, a higher catch-up contribution limit of $11,250 applies for employees aged 60, 61, 62, and 63 in the calendar year. These allow individuals in those age groups to contribute an extra amount above the standard limit each year, giving them an additional boost to their retirement savings as they approach their golden years.

Important future change: Be aware that starting in 2026, a new rule will require that all catch-up contributions for employees who earned more than $145,000 in the previous year must be made on a Roth (after-tax) basis.

What happens if you contribute too much?

It is the employee’s responsibility to monitor their personal contributions across all employers in a calendar year to ensure they do not exceed the IRS limit. If an employee does contribute more than the annual limit, the correction process depends on how the excess occurred.

• Excess in a single 401(k) plan: If you contribute more than the annual limit within a single plan, your plan administrator is responsible for correcting the error. The plan must distribute the excess contribution, plus any investment earnings, back to you. If this is done by April 15 of the following year, you will pay income tax on the excess amount for the year the contribution was made, and you will pay income tax on the earnings in the year they are distributed.

• Excess across multiple 401(k) plans: This can happen if you work for more than one company during the year. For example, if you contribute $15,000 to a 401(k) at your first job and then contribute $15,000 at a new job in the same year, you will have exceeded the $23,500 limit for 2025. In this scenario, you are responsible for identifying the excess and notifying one of the plans. You must request a corrective distribution of the excess amount and its earnings from one of the plans before the April 15 tax deadline to avoid a significant penalty.

Note:  This deadline cannot be altered by Human Interest. Failing to correct an excess contribution by the IRS deadline results in double taxation. The excess amount is taxed in the year it was contributed, and it will be taxed again when it is eventually distributed from the retirement account.