The following information is valuable for individuals focusing on building their retirement savings.
To sustain a comfortable lifestyle in retirement, it is generally necessary to enter the phase with savings or an income source beyond Social Security. Currently, the typical retired worker receives about $1,922 monthly in Social Security benefits, equating to an annual income of approximately $23,000. This amount may cover basic needs but leaves little room for additional expenses such as hobbies, travel, and entertainment.
For those looking to build retirement savings, several options are available. Participation in an employer-sponsored retirement plan is one possibility. However, if such a plan is not accessible, an individual retirement account (IRA) may serve as an alternative worth considering.
Recently, the IRS announced the IRA contribution limits for 2025. Individuals aiming to maximize their IRA contributions should take note of these updates.
### IRA Limits to Remain Unchanged in 2025
As it stands, the maximum IRA contribution is $7,000 for individuals under the age of 50 and $8,000 for those 50 or older. These limits will remain unchanged in 2025. This may come as a surprise to some, especially given that the SECURE 2.0 Act of 2022 provided for an annual cost-of-living adjustment to IRA catch-up contributions. However, it is important to remember that while the catch-up limit can increase, it will not necessarily do so each year. For 2025, it remains steady at $1,000.
### Benefits of Funding an IRA for Retirement
IRAs have lower contribution limits compared to 401(k) plans, which, in the next year, will have maximum contributions of $23,500 for those under 50 and $31,000 for those 50 and over. Many employers also offer matching contributions for 401(k)s, aiding in increasing savings.
Despite these differences, IRAs offer several advantages. Contributions to a traditional IRA can offer tax benefits by shielding some income from taxes. Additionally, IRAs provide specific benefits that 401(k)s do not.
Firstly, an IRA can be opened at any financial institution that offers one, providing the opportunity to select a retirement plan that best suits individual needs. In contrast, 401(k) plans are limited to those offered by employers.
Secondly, IRAs allow investors to choose individual stocks for their investment portfolios, whereas 401(k) plans typically offer a limited selection of funds. This ability to select investments provides several benefits.
Investors gain full control over their chosen assets, avoiding the potentially high fees (expense ratios) associated with some 401(k) funds, which can significantly impact returns. An IRA offers the possibility to build a portfolio that may outperform the overall stock market.
While it may be discouraging to learn that IRA limits will not increase in 2025, individuals can still benefit greatly by maximizing their contributions in the coming year.
Moreover, retirement savings do not have to be confined to the $7,000 or $8,000 limits in 2025. After maximizing IRA contributions, individuals can explore other retirement savings accounts, such as health savings accounts (HSAs) or even taxable brokerage accounts.
