Your 401(k) retirement plan isn’t just a savings account—it’s one of the most powerful tools you have for building a secure financial future. From contribution limits to tax advantages, understanding how to maximize your 401(k) can help you make the most of your retirement strategy. Below, we’ve compiled answers to the most common questions about 401(k) plans, updated with the latest information for 2025.

What’s the Difference Between a Traditional 401(k) and a Roth 401(k)?

The primary difference between a Traditional and Roth 401(k) lies in how your contributions and withdrawals are taxed:

• Traditional 401(k): Contributions are made on a pre-tax basis, reducing your taxable income now. However, you’ll pay taxes on withdrawals in retirement.
• Roth 401(k): Contributions are made with after-tax dollars, meaning you pay taxes upfront. Withdrawals in retirement, including earnings, are generally tax-free.

Choosing between the two depends on your current tax situation and whether you expect your tax rate to be higher or lower in retirement. Many savers benefit from contributing to both types to diversify their tax advantages.

How Are Contributions Made to My 401(k) Plan?

Contributing to your 401(k) is straightforward and typically occurs in two ways:

1. Payroll Deductions: You determine how much of your paycheck to contribute. This amount is automatically deducted each pay period, making saving consistent and easy.
2. Employer Contributions: Many employers match a percentage of your contributions. For example, if your employer offers a 100% match on the first 4% you contribute, you’ll want to save at least that much to take full advantage of this “free money.”

What Are the 401(k) Contribution Limits for 2025?

The IRS has raised the contribution limits for 401(k) plans in 2025 to help you save even more:

• Employee Contribution Limit: $23,500 (up from $23,000 in 2024).
• Catch-Up Contributions (Age 50+): If you’re 50 or older, you can contribute an additional $7,500, bringing your total to $31,000.
• New Additional Catch-Up Contributions (Age 60–63): Under the SECURE 2.0 Act, participants aged 60–63 can contribute an additional $11,250, bringing their total contribution potential to $34,750 in 2025.

Combined Employer and Employee Contributions: The total contributions to your 401(k), including employer matches, cannot exceed the lesser of $70,000 or 100% of your compensation.

What Is a 401(k) Rollover?

A rollover involves transferring funds from an old retirement account into your current employer’s 401(k) or an IRA. This can simplify account management and ensure your savings continue to grow tax-advantaged.

For example, if you switch jobs, you can move funds from your previous 401(k) into your new plan (if allowed) or an IRA. Rollovers help you avoid taxes and penalties that could apply if you simply withdrew the funds.

What Are My Options for Withdrawing Funds?

While 401(k)s are intended for retirement, certain situations allow for withdrawals:

1. Required Minimum Distributions (RMDs): Starting at age 73, you must withdraw a minimum amount annually. New penalties for missed RMDs take effect in 2025, so it’s crucial to plan carefully.
2. Hardship Withdrawals: If you experience a significant financial hardship (e.g., medical expenses, funeral costs), you may qualify for a hardship withdrawal. These withdrawals are subject to taxes and possibly penalties.
3. 401(k) Loans: Some plans allow you to borrow up to the lesser of $50,000 or 50% of your vested balance. Loans must typically be repaid within 1–5 years, though longer terms may apply if purchasing a home.

How Does Automatic Enrollment Work in 2025?

Under the SECURE 2.0 Act, new 401(k) plans established after December 29, 2022, must include automatic enrollment starting in 2025.

• Initial contributions must be at least 3% of your salary, increasing by 1% annually until they reach at least 10% but no more than 15%.
• Employees can opt out or adjust their contribution rates at any time.

Automatic enrollment is designed to make saving easier and more consistent, helping more people build retirement security.

How to Maximize Your 401(k) in 2025

To make the most of your 401(k) this year:

• Start Early: Contributions benefit from compound growth over time, so don’t delay.
• Max Out Employer Matching: Always contribute enough to take full advantage of your employer’s match. It’s essentially free money!
• Increase Contributions Over Time: Aim to increase your contributions annually, especially as limits rise.
• Leverage Catch-Up Contributions: If you’re 50+ or in the new 60–63 age group, take advantage of the higher limits to supercharge your savings.
• Consider Both Traditional and Roth Options: Diversify your tax strategy to balance short-term savings with long-term tax-free growth.

Staying Ahead of Changes

The retirement landscape continues to evolve with new laws, contribution limits, and savings opportunities. By staying informed, you can ensure your 401(k) remains a cornerstone of your financial future.

If you have more questions about your 401(k) or want to discuss your overall retirement strategy, our team at Navalign Wealth Partners is here to help. Schedule a consultation today to make the most of your financial future.