The average retired worker receiving Social Security benefits accumulates approximately $23,000 annually, which is often insufficient for living expenses. Fidelity reports that a typical 65-year-old today may spend around $165,000 on healthcare throughout retirement. Consequently, saving for retirement is crucial, with tax-advantaged savings plans like IRAs and 401(k)s offering effective options for future financial security.
Both traditional IRAs and 401(k)s provide tax benefits on contributions and offer tax-deferred investment gains. Unlike a standard brokerage account, where annual taxes on capital gains may apply, taxes on gains in an IRA or 401(k) are deferred until withdrawals are made.
Each year, the Internal Revenue Service (IRS) updates the contribution limits for IRAs and 401(k)s. For 2025, it was announced that individuals under the age of 50 can contribute up to $23,500 to their 401(k), which is a $500 increase from 2024. Those aged 50 or older are entitled to make catch-up contributions, which remain unchanged at $7,500. Therefore, individuals aged 50 or older by the end of 2025 can contribute up to $31,000 to their 401(k).
Regarding IRAs, the contribution limit for individuals under 50 in 2025 remains at $7,000, consistent with 2024. The catch-up contribution limit for those aged 50 and above also remains at $1,000, allowing them to contribute a total of $8,000. Individuals without access to an employer-sponsored retirement savings plan can establish an IRA at a financial institution offering such services and manage the account independently.
It is advisable to maximize contributions to retirement plans in 2025 if possible. Even though reaching the maximum contribution limits may be challenging, particularly for IRAs, every effort should be made to save as much as feasible. At the beginning of the year, setting up a budget that accommodates IRA or 401(k) contributions is recommended, and automating these contributions can help maintain consistency.
For those with a 401(k), contributions are typically deducted directly from paychecks, while an IRA usually requires setting up an automatic transfer from a bank account. Funding retirement accounts generously, such as making a $5,000 contribution, can yield considerable future benefits. For instance, earning an average annual return of 10% over 35 years with that contribution could result in a future value of over $140,000.
Starting with smaller contributions in 2025 is acceptable, with the option to increase them as financial situations improve, such as through side jobs or raises. Enhancing retirement savings can provide substantial benefits in the long term.
