Contributing to your employer-sponsored retirement plan is one of the most effective ways to reduce your current taxable income while investing in your future. In this week’s Tax Tip Tuesday, we’re focusing on why maxing out your 401(k) or employer retirement plan can be a powerful tax planning move—and what the updated limits mean for 2025.

Why 401(k) Contributions Matter for Tax Planning

Contributions to a traditional 401(k) are made with pre-tax dollars, which means they reduce the amount of income subject to federal income tax in the year you contribute.

This provides two key benefits:

• Immediate tax savings by lowering taxable income
• Long-term retirement growth through tax-deferred compounding

For many taxpayers, this is one of the simplest and most effective tax strategies available.

2025 401(k) Contribution Limits You Should Know

For the 2025 tax year:

• The maximum employee contribution is $23,000
• Taxpayers age 50 and older may contribute an additional $7,500 catch-up contribution

That means eligible participants over 50 can potentially defer up to $30,500 into their workplace retirement plan.

These limits apply per individual and can significantly reduce taxable income when used strategically.

How Maxing Out Your 401(k) Lowers Your Tax Bill

When you increase your 401(k) contributions:

When you increase your 401(k) contributions:

• Your adjusted gross income (AGI) may decrease
• You may fall into a lower tax bracket
• Certain deductions or credits may become more accessible

For higher-earning individuals and dual-income households, maximizing retirement contributions often plays a key role in managing annual tax exposure.

Common Mistakes We See with Employer Retirement Plans

Even taxpayers who contribute regularly may miss opportunities due to:

• Stopping contributions short of the annual limit
• Failing to increase contributions after raises or bonuses
• Overlooking catch-up contributions after age 50
• Not coordinating retirement savings with overall tax strategy

These oversights can result in higher taxes today and missed growth over time.

How to Approach 401(k) Contributions Strategically

Rather than setting a contribution amount once and forgetting it, consider:

• Reviewing contributions annually
• Increasing deferrals when income rises
• Coordinating retirement savings with other tax planning strategies
• Evaluating how contributions impact both short-term cash flow and long-term goals

A thoughtful approach ensures retirement contributions support both current tax efficiency and future financial security.

Tax Tip Tuesday Takeaway

Maxing out your 401(k) isn’t just about retirement—it’s a smart way to lower your taxable income today while building long-term wealth. With higher contribution limits in 2025, this strategy is more valuable than ever.

Need Help Optimizing Your Retirement Contributions?

Working retirement planning into a broader tax strategy can help ensure you’re taking full advantage of available benefits—without overextending your budget.

A proactive review can make a meaningful difference both now and in the years ahead.