If you have a 401(k), 403(b), 457, or Federal Thrift Savings Plan, your annual contribution limits just got a lot more complicated… but in a good way. You should take action in December to be sure that you take full advantage of the IRS rule changes for 2025. These are all deferred compensation retirement plans, meaning that you contributed pre-tax income to them. That income grows until you withdraw money from the plans in retirement at which time you pay regular income tax on the withdrawals. While the money grows in the plans, you do not have to pay annual interest, dividend, or capital gains taxes.
- The contribution limits for 401(k), 403(b), 457, and Thrift Savings Plans will increase in 2025 to $23,500
- People over age 50 can make an additional $7,500 in catch-up contributions
- People born in 1962, 1963, 1964, or 1965 can make a $11,250 catch-up contribution
- There are tax penalties for over-contributing so care should be taken when setting contribution deductions from monthly paychecks
The basics of tax-deferred retirement plans
A 401(k) is a retirement plan for workers employed by for-profit companies. A 403(b) is a very similar plan for workers employed by non-profit companies. A 457 is a similar plan for workers employed by state or local government institutions. The Federal Thrift Savings Plan (TSP) is for workers employed by the Federal government. Because 80% of U.S. physicians are now employed by hospitals or corporations, most doctors are eligible to contribute to one of these types of retirement plans. Physicians employed by public universities are often eligible to contribute to both a 403(b) and a 457 plan.
For employed physicians, these contributions are generally deducted from their regular monthly income. As a result, annual contributions reduce one’s taxable income for that year, thus reducing their marginal income tax rate and lowering their overall tax burden. This is a particular advantage for older individuals who are usually in their peak earning years and paying the highest marginal income tax rates of their careers. Once retired, most people’s annual taxable income falls, resulting in a lower marginal income tax rate. When withdrawing from a 401(k), 403(b), 457, or TSP in retirement, most people will pay less in income taxes on the withdrawal than they would have in their working years.
Each year, the IRS sets a limit on the amount of income that a person can contribute to a 401(k), 403(b), 457, or TSP. For example, in 2024, that limit was $23,000 per year. There is an additional “catch-up” amount that people over age 50 can contribute – in 2024, that catch-up amount was $7,500, meaning that those over age 50 could contribute a total of $30,500 ($23,000 + $7,500).
New limits in 2025
In 2025, the contribution limit for the 401(k), 403(b), 457, and TSP will increase by $500 to $23,500 and the catch-up amount for people over age 50 will remain at $7,500. But here is where things get complicated. If a person will be ages 60-63 in 2025, the catch-up limit is $11,250 instead of $7,500. For those who will be 64 or older, the catchup limit reverts to $7,500. The IRS determines eligibility age by birth year, so you cannot contribute the higher amount in the year that you turn 64. The table below shows the amount a person can contribute based on the year that the person was born.
| Birth Year | Base Contribution Limit | Catch-up Limit | Total Contribution Limit |
| 1976 or later | $23,500 | $0 | $23,500 |
| 1966-1975 | $23,500 | $7,500 | $31,000 |
| 1962-1965 | $23,500 | $11,250 | $34,750 |
| 1961 or earlier | $23,500 | $7,500 | $31,000 |
The reason that the IRS has increased the catch-up contribution limits for people age 60-63 is that Americans are behind in retirement savings and the Federal government is trying to encourage people to save more, particularly those close to retirement age. A survey the Federal Reserve found that the average family between ages 55 – 64 was only $537,560. Another survey by the Federal Reserve found that among Americans of all ages, 46% do not have a dedicated retirement account. A survey by AARP found that 20% of Americans over age 50 had no retirement savings and half of those over 50 were worried that they will not have enough savings to last them through retirement. Most of us can no longer rely on pensions and Social Security to finance our retirements, so regular contributions to a tax-deferred retirement plan is essential.
Most people spread their tax-deferred retirement plan contributions out over the course of the year. So, for example, if you get paid monthly, you would contribute a set amount from each month’s paycheck. Each employer will have different rules about how often you can change your contribution amounts and the process involved in making those changes. It is ideal to contact your employer in December each year so that you can start contributing at the higher amount right away in the new year, starting with your January paycheck. The maximum amount to request taken out each month in 2025 is:
- $1,958 monthly for an annual contribution limit of $23,500
- $2,583 monthly for an annual contribution limit of $31,000
- $2,895 monthly for an annual contribution limit of $34,750
Financial advisors typically recommend saving about 15% of one’s annual income toward retirement. At 15%, a person would need to have an annual total income of over $156,000 to reach the maximum contribution limit. For this reason, most Americans will not contribute the maximum amount to their 401(k), 403(b), 457, or TSP because their income is not high enough. But high-income Americans (such as physicians) can afford to contribute the maximum to their tax-deferred retirement plans. Physicians employed by many state-supported public universities can double these contribution limits by maximizing contributions to both a 403(b) and 457.
But beware…
If you overshoot your contributions to a 401(k), 403(b), 457, or TSP, there are severe tax penalties imposed by the IRS. You must withdraw any amount over the contribution limit and pay a 10% early withdrawal penalty on that amount. You will also need to get a revised W-2 form and re-file your taxes for that year. In other words, you’ll incur both a huge financial cost and a huge paperwork cost by over contributing.
The risk of over contributing is highest for those people who have two employers and tax-deferred retirement plans with both. For example if you are younger than age 50 and contribute to 403(b) plans by two different employers, the total amount that you can contribute is $23,500. Because those two employers do not usually communicate your personal information with each other, one will not usually know that you are also contributing to another. So, it is up to you to track the amounts that you contribute to different retirement accounts to be sure that you do not over-contribute.
For people born in 1962, 1963, 1964, or 1965 who take advantage of the higher catch-up contribution of $11,250, there is also a risk of over-contribution penalties in future years if they do not reduce their annual contributions when they get older. For example, a person born in 1962 will be able to contribute a total of $34,750 to their tax-deferred retirement plan in 2025, but can only contribute $31,000 in 2026. That person would therefore need to reduce the amount taken out of their monthly paycheck for their 401(k), 403(b), 457k, or TSP beginning in January 2026 to avoid incurring an over-contribution penalty in 2026.
In 2026, things get even weirder
Beginning in 2026, high income-earners age over age 50 will still be able to make higher catch-up contributions to their tax-deferred retirement plan but those contributions will have to be made to a Roth account. The income level necessary to qualify as a high income-earner in 2026 has not yet been set by the IRS but in 2023, that level was an income greater than $145,000, Because the IRS sets this limit based on inflation, it will likely be higher than $145,000 in 2026. Therefore, in 2026, if you have a 403(b) and were born in 1976 or earlier, your catch-up contributions would need to go to a Roth 403(b).
Unlike a regular tax-deferred retirement plan where you pay income tax the year you withdraw money from the plan in retirement, with a Roth plan, you pay income tax the year that you contribute to the plan and then pay no income tax on the withdrawals in retirement. Ideally, you should contribute to Roth accounts in years that your income tax rate is lower than it will be when you retire. For most people, this means contributing to a Roth 401(k) or Roth 403(b) early in their careers, when their annual income is relatively low. Conversely, when people are late in their careers (i.e., over age 50) and have a high annual income, it is usually unfavorable to contribute to a Roth 401(k) or Roth 403(b).
Because of these new Roth requirements, in 2026 the tax advantages of catch-up contributions for high income-earners will not be as great as they are in 2025. But, you will still be financially better off in the long run by putting those catch-up contributions in a Roth account than you would be by putting that money in a regular after-tax investment since you will have to pay annual taxes on the interest and dividends as well as capital gains taxes when you sell the investment. In a Roth account, you do not have to pay interest, dividend, or capital gains taxes.
What about IRAs?
The new catch-up amounts only apply to 401(k), 403(b), 457, and TSP plans. They DO NOT apply to IRAs. In 2025, the contribution limit for IRAs is unchanged at $7,000 per year with an additional catch-up amount of $1,000 for those people over age 50.
High income earners cannot contribute directly to a Roth IRA. The IRS definition of a high income earner is complex and depends on filing status. Above the income limit there is a “phase-out” income range allowing for a reduced contribution to a Roth IRA. Above the phase-out limit, you cannot directly contribute to a Roth IRA. For example, for a married couple filing jointly, the income limit is $236,000 with a phase-out income range between $236,000 – $246,000. Most physicians in clinical practice have a high enough income that they are unable to directly contribute to a Roth IRA. However, they can do a “backdoor Roth” by first contributing post-tax income into a traditional IRA and then immediately converting that traditional IRA into a Roth IRA. This allows a person to contribute $7,000 each year to a backdoor Roth with those over age 50 able to do an additional $1,000 catch-up contribution. The backdoor Roth is a great way to save for retirement after maximizing contributions to your 401(k), 403(b), 457, or TSP.
For high income earners whose employer permits after-tax contributions to their 401(k) or 403(b) plan, there is also the option of doing a “mega backdoor Roth” conversion. In this case, the IRS permits you to put an additional $46,000 of after-tax income (above your regular pre-tax contribution amount) into your 401(k) or 403(b) and then convert that $46,000 into a Roth 401(k) or Roth 403(b). Not all 401(k) and 403(b) plans allow these additional after-tax contributions so check with your employer to see if the mega backdoor Roth is an option.
Start early and contribute regularly
Over the past 35 years, I’ve seen physicians make just about every retirement savings mistake possible. The result is having to work long past their desired retirement age or not being able to do the things they planned on doing in retirement. Having a lot of money in retirement does not guarantee a happy retirement but not having enough money can make for an unhappy retirement. There are a few steps to ensuring adequate post-retirement income. Start saving early to take advantage of the magic of compounding interest. Save regularly, ideally by contributing to your retirement savings plan by monthly deductions from your paycheck. Maximize your annual contributions to your 401(k), 403(b), 457, or TSP. If you can afford it after maximizing those contributions, do a backdoor Roth IRA every year. If your employer offers both a 403(b) and a 457 plan, contribute to both. These steps will not ensure a happy retirement but they will stack the odds in your favor.
November 25, 2024
