Contributing to a retirement account has arguably been one of the best deductions available from year to year. As the end of the year approaches, it could be a great time to determine whether you should contribute the maximum amount to some or all of your “deductible” accounts. If the goal is to increase your deductions for 2025, and you have the extra cash, it could be worth it to max out your company and personal retirement accounts. Naturally, that means we need to understand how much that could be for each account.
Key Takeaways
- Traditional 401(k) plans are the most common employer retirement plan, allowing employees to contribute a percentage of their income up to IRS-set limits.
- SEP IRAs offer a simple retirement option for small businesses without a 401(k), allowing only employer contributions, but requiring the employer to open accounts for all eligible employees and contribute the same percentage to everyone.
- Companies with more employees often choose SIMPLE IRAs because they allow employee contributions and limit employers to either a 3% match or a flat 2% contribution. This plan is easier to administer but offers lower overall contribution and deduction potential vs. more robust plans.
- Those without access to an employer retirement plan can still save through Traditional or Roth IRAs, though deductibility of Traditional IRA contributions may be limited if their spouse has a workplace plan or exceeds certain income thresholds.
Maxing out a 401(k)
The most popular retirement plan for companies to offer is the Traditional 401(k) plan. 401(k) plans are defined-contribution plans, and the employee is responsible for making contributions to the account. Generally, people will save a percentage of their total income, say 5% or 10%. The IRS has set limits for these contributions, however, so those making six figures cannot hide an entire year’s worth of income into a 401(k) each year.
The limits are broken into two sections: an employee maximum and an employer maximum. For 2025, the employee contribution limit for those under 50 is $23,500. Those older than 50 can contribute an extra $7,500 each year (so $31,000). Finally, those 60-63 get specific access to an additional catch-up contribution of $11,250 (so $33,750 total). It could be helpful for employees to do the quick math on their contributions to see how close they are to their contribution limits. For example, a 45-year-old making $150,000 and contributing 10% each paycheck to her 401(k) would have $15,000 saved by the end of the year. Since her limit for 2025 is $23,500, she could use the few remaining paychecks this year to save the remaining $8,500 to max out her 401(k) (if that is her goal).
Importantly, this employee limit does not include any match that the company would provide; that is the other calculation. The employer’s maximum is calculated from the employer’s contributions to the employee’s account. For 2025, the IRS capped total 401(k) contributions (employee + employer) at $70,000 for those under 50. Those over 50 could save $77,500, and those from 60-63 could save a maximum $81,250. Therefore, using the example of the 45-year-old, if the employee’s maximum is $23,500 and the total maximum is $70,000, then the employer can contribute up to $46,500. However, employees may not have too much say in how much their employer would contribute, since usually it is a set matching contribution for a few percent of an employee’s contribution.
From the business owner’s perspective, this could become more beneficial depending on the number of employees in the business. For owners with no employees, the employee and employer contributions are almost semantics, since the owner is “on both sides of the fence”. In this case, a Solo 401(k) could be a great retirement tool and possibly allow you to easily contribute up to the $70,000 maximum. It is important to note that employer contributions are generally limited to 25% of compensation. Compensation is the operative word in this case, so check with your accountant on how much you need to “earn” to check this box.
SEP IRA
For companies without a 401(k), there are certainly still ways to maximize the current retirement plan. The SEP IRAs are a good example; they are well-suited retirement plans for small companies. Technically, there are no employee contributions and only employer contributions. The employer generally must open a SEP IRA for everyone in the business and contribute the same percentage to every account, up to 25% of compensation or $70,000. Depending on the circumstance, SEP IRAs could be an easier version than the Solo 401(k). But for those owners with employees, generally, they must be willing to contribute to each co-worker the same contribution percentage as their own account.
Simple IRA
As more employees are involved, many companies use the SIMPLE IRA as their retirement plan of choice. The primary reason for doing so is that it reintroduces the employee contribution, instead of the employer making all contributions like the SEP IRA. Recent legislation from the SECURE ACT 2.0 has changed the maximum amount that can be saved into a SIMPLE IRA and primarily depends on the number of employees (and the employee’s age, again). Employees can contribute up to $16,500 for 2025, with $3,500 catch-up for those over 50 or a $5,250 extra catch-up for those 60-63. For companies with fewer than 25 employees, they can contribute up to $17,600 (with a $3,850 catch-up).
From the employer side of Simple IRAs, they are generally restricted to matching contributions. Either they can make a one-for-one matching contribution up to 3%, or they can make a 2% contribution to everyone regardless of whether they contribute. Clearly, there are a lot of rules around Simple IRAs when it comes to the employee and employer maximums, and you should check with your accountant for your specific situation. After doing so, it will likely still be very clear that Simple IRAs will not provide the same level of contributions/deductions that other retirement plans would allow.
Traditional IRA
Some people do not have access to a company-level retirement plan (or have not set up one). For these situations, it is still possible to contribute to a traditional IRA and save some for the future. While it is significantly less, employed people who are not actively participating in a retirement plan at work can contribute up to $7,000 to a Traditional IRA for 2025. Those over 50 can contribute an extra $1,000 each year as well. This does apply to Roth IRAs as well, for context. So, each year you can contribute up to the $7,000 maximum, regardless of whether it went into a Roth or a Traditional IRA.
Since the purpose of this article is about claiming deductions through retirement plans, it is important to note that there are situations where these IRA contributions are not deductible. Generally, they are related to the employee or their spouse having access to a retirement plan at work. There are income limits that will phase out the IRA deduction to be aware of.
Ask Questions
There are many rules around each retirement plan, especially depending on the plans available to you. There is a very important distinction between what the government has set as the maximum contribution and what your company’s specific plan will allow. That is why it is very important to understand exactly what you can and can’t do with your specific retirement plan. For owners, it can be even more crucial since you may need to switch retirement plans altogether to meet your goals. Ultimately, a tax advisor can help you walk through the best way to maximize your retirement contributions and deductions for 2025.
TC Falkner 