The new year is an opportunity to reassess your 401(k) plan and ensure your retirement savings are on track. With recent changes in contribution limits and regulations, maximizing your plan now can significantly impact your long-term financial security.
Here’s how you can make the most of your 401(k) this year.
Take Advantage of Higher Contribution Limits
For 2025, the IRS has increased the contribution limits for 401(k) plans. You can now contribute up to $23,500 if you’re under 50 and those aged 50 or older.
Maximizing your contributions is one of the most powerful ways to grow your retirement savings, thanks to tax advantages and compound interest. If you’re not contributing up to the new limit, revisit your budget and prioritize increasing your deferral rate. You can set up automatic contribution escalations in your plan. This makes sure that you’re increasing your savings each year without needing to think about it.
Reevaluate Your Investment Allocation
The new year is a great time to revisit your investment mix as the markets keep evolving. Review your current asset allocation to make sure that it aligns with your risk tolerance and retirement timeline. For example:
- If retirement is years away, consider growth-focused options like equity funds.
- If you’re closer to retirement, shift to safer investments like bonds or stable funds.
Additionally, take advantage of any financial advice tools or consultations your plan administrator offers to help you optimize your choices.
Monitor Fees Closely
Hidden fees can eat away at your retirement savings. Administrative costs, mutual fund expense ratios, and advisory fees are often overlooked but can significantly impact your returns over time.
Review your 401(k) plan’s fee disclosures and compare the costs of investment options. Consider shifting to lower-cost index funds or ETFs if they align with your investment goals.
Maximize Employer Contributions
If your employer offers a matching program, make sure that you’re contributing enough to receive the full match. This is essentially extra money added to your retirement savings.
If your employer matches 100% of your contributions up to 4%, make sure you’re deferring at least 4% of your salary. Review your employer’s match schedule (e.g., annual, quarterly, or per pay period) to ensure you’re capturing the maximum amount.
Explore Roth 401(k) Options
If your plan offers a Roth 401(k), consider incorporating it into your retirement strategy. Unlike traditional 401(k) contributions, Roth contributions are made with after-tax dollars, allowing your investments to grow tax-free.
They can be especially valuable if you expect to be in a higher tax bracket later or want flexibility with taxable income during retirement.
Don’t Neglect Catch-Up Contributions
Legislation like the SECURE 2.0 Act has introduced changes that could benefit your 401(k). This update includes penalty-free emergency withdrawals and mandatory auto-enrollment for new plans. Understanding the following changes can allow you to take full advantage of your plan’s features:
- Mandatory auto-enrollment for new 401(k) plans (beginning in 2025).
- Penalty-free withdrawals for certain emergencies, such as terminal illness or disaster relief.
Diversify Retirement Savings and Plan Resources
Consider other options like IRAs, Health Savings Accounts (HSAs), or brokerage accounts to further build your retirement funds. Diversification reduces risk and provides flexibility for different financial goals. Additionally, many 401(k) providers offer resources like financial planning tools, calculators, or access to professional advisors.
Ready for a perfect savings strategy? We at South Star Wealth Management can guide you through 2025’s 401(k)’s features and create a tailored plan for your goals. Schedule a meeting with our experts today!