401(k) Contribution Limit Increases to $23,500 for 2025; IRA Limit Unchanged at $7,000

(Parker Tax Publishing November 2024)

The IRS released the annual cost-of-living adjustments (COLAs) affecting dollar limitations for pension plans and other retirement-related items for 2025. The 401(k) contribution limit increases to $23,500 up from $23,000 for 2024, while the annual IRA contribution deduction is unchanged at $7,000. Notice 2024-80.

On November 1, the IRS issued the annual cost-of-living adjustments (COLAs) for pension plans and other retirement-related items for 2025. Many of the pension plan limitations will change for 2024 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. In addition, under a change made by SECURE 2.0 Act of 2022 (Pub. L. 117-328) that applies beginning in 2025, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in a 401(k) plan, 403(b) plan, governmental 457 plan, or the federal government's Thrift Savings Plan. A higher catch-up limit also applies for employees aged 60, 61, 62, and 63 who participate in SIMPLE plans. For these employees, the SECURE 2.0 Act increases the catch-up limit to the greater of (1) $10,000 or (2) 50 percent more than the regular catch-up amount, and the increased amount is adjusted for inflation beginning in 2025.

The changes provided in Notice 2024-80 include:

(1) The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $23,000 to $23,500.

(2) The salary reduction contribution limit under Code Sec. 408(p)(2)(E) for SIMPLE IRAs is increased from $16,000 to $16,500. The limitation for certain of those accounts or plans under Code Sec. 408(p)(2)(E)(i)(I) or (II) remains $17,600.

(3) The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains $7,500. The catch-up contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who attain age 60, 61 62, or 63 in 2025 is $11,250. The dollar limitation under Code Sec. 414(v)(2)(B)(ii) for catch-up contributions to a SIMPLE 401(k) plan described in Code Sec. 401(k)(11) or a SIMPLE IRA described in Code Sec. 408(p) for individuals aged 50 is unchanged at $3,500. The dollar limitation under Code Sec. 414(v)(2)(E)(ii) for catch-up contributions to a SIMPLE 401(k) plan or a SIMPLE IRA for individuals who attain age 60, 61, 62, or 63 in 2025 is $5,250. The dollar limitation under Code Sec. 414(v)(2)(B)(iii) for catch-up contributions to certain SIMPLE 401(k) or SIMPLE IRA plans or accounts that generally applies for individuals age 50 or over remains $3,850.

(4) The deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions to a traditional IRA remains $7,000. The IRA catch-up contribution limit for individuals aged 50 and over remains $1,000 for 2025.

(5) The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $79,000 and $89,000, increased from between $77,000 and $87,000 in 2024. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is between $126,000 and $146,000, increased from between $123,000 and $143,000 in 2024. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $236,000 and $246,000, increased from between $230,000 and $240,000 in 2024. For a married individual filing a separate return who is an active participant, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

(6) The AGI phase-out range for taxpayers making contributions to a Roth IRA is $236,000 to $246,000 for married couples filing jointly, up from $230,000 to $240,000 in 2024. For singles and heads of household, the income phaseout range is $150,000 to $165,000, up from between $146,000 to $161,000 in 2024. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

(7) The limit on the annual benefit under a defined benefit plan under Code Sec. 415(b)(1)(A) is increased from $275,000 to $280,000. For a participant who separated from service before January 1, 2025, the limitation for defined benefit plans under Code Sec. 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2023, by 1.0262.

(8) The limit on annual additions for defined contribution plans under Code Sec. 415(c)(1)(A) is increased in 2023 from $69,000 to $70,000.

(9) The annual compensation limit under Code Secs. 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $345,000 to $350,000.

(10) The dollar limitation under Code Sec. 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $220,000 to $230,000.

(11) The limitation used in the definition of highly compensated employee under Code Sec. 414(q)(1)(B) is increased from $155,000 to $160,000.

(12) The compensation amount under Reg. Sec. 1.61-21(f)(5)(i) concerning the definition of control employee for fringe benefit valuation purposes is increased from $135,000 to $140,000. The compensation amount under Reg. Sec. 1.61-21(f)(5)(iii) is increased from $275,000 to $285,000.

(13) The dollar amount under Code Sec. 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is increased from $1,380,000 to $1,415,000, while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $275,000 to $280,000.

(14) The annual compensation limitation under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Code Sec. 401(a)(17) to be taken into account, is increased from $505,000 to $520,000.

(15) The compensation amount under Code Sec. 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains $750.

(16) The AGI limitation under Code Sec. 25B(b)(1)(A) (i.e., relating to the 50 percent applicable percentage) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $46,000 to $47,500; the limitation under Code Sec. 25B(b)(1)(B) (i.e., relating to the 20 percent applicable percentage) is increased from $50,000 to $51,000; and the limitation under Code Sec. 25B(b)(1)(C) (relating to the 10 percent applicable limitation) and Code Sec. 25B(b)(1)(D) (relating to the zero percent applicable limitation), is increased from $76,500 to $79,000.

(17) The AGI limitation under Code Sec. 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $34,500 to $35,625; the limitation under Code Sec. 25B(b)(1)(B) is increased from $37,500 to $38,250; and the limitation under Code Secs. 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $57,375 to $59,250.

(18) The adjusted gross income limitation under Code Sec. 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $23,000 to $23,750; the limitation under Code Sec. 25B(b)(1)(B) is increased from $25,000 to $25,500; and the limitation under Code Secs. 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $38,250 to $39,500.

(19) The dollar limitation on premiums paid for a qualifying longevity annuity contract under Reg. Sec. 1.401(a)(9)-6(q)(2)(ii) is increased from $200,000 to $210,000.

(20) The aggregate amount of qualified charitable distributions that are not includible in gross income under Code Sec. 408(d)(8)(A) is increased from $105,000 to $108,000. The amount of qualified charitable distributions made directly to a split-interest entity that are not includible in gross income under Code Sec. 408(d)(8)(F) pursuant to a one-time election is increased from $53,000 to $54,000.

For a discussion of tax treatment of traditional, Roth, and SIMPLE individual retirement arrangements, see Parker Tax ¶134,500, ¶135,100, and ¶133,100 respectively. For a discussion of the tax treatment of 401(k) plans, see Parker Tax ¶131,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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