Maximize Your Savings in Employer 401(k) and 403(b) Plans

If you are an actively employed with access to an employer-sponsored 401(k) plan, 403(b) plan, or Thrift Savings Plan, are you maximizing your retirement contributions each year?

I continue to be surprised by how many new clients have been contributing far less than the annual maximum amounts. Sometimes this is due to limited cash flow or financial capacity to contribute. But more often this is due to a lack of understanding about the employer plan rules. Some have not been contributing at all - even if the employer offers matching contributions. In this case, they are leaving free money on the table.

Most plans offer an employer match, anywhere from 1% to 5% or more. But in many cases, employees contribute only the percentage of salary that is matched by the employer, not recognizing their potential to save much more. Employer matching contributions usually have a vesting schedule, so know your employer’s vesting schedule, especially if you plan to change jobs before your funds are 100% vested.

How much can you contribute in 2025?

Retirement savings accounts have specific contribution limits that are adjusted annually by the IRS to account for inflation. In 2025:

· The contribution limit for 401(k), 403(b), governmental 457 plans, and the Thrift Savings Plan = $23,500 for individuals under 50.

· Those aged 50 and older can make an additional $7,500 catch-up contribution, raising the total limit to $31,000.

· New this year due to SECURE 2.0 Act: Employees aged 60 to 63 (determined by your attained age as of 12/31/2025) are entitled to a higher catch-up contribution: up to $11,250.

Strategies to Save More

Saving more for retirement can be daunting if cash flow is tight or large expenses (e.g., college) loom on the horizon. Here are some strategies that may help:

· Set Up Automatic Contributions - This ensures a portion of your income is directed to your retirement accounts before you spend it. This reduces temptation to use those funds for discretionary expenses, and makes saving a seamless and habitual process. Many employers offer payroll deduction options for 401(k) contributions.

Review your current contributions to confirm they are aligned with your financial goals. Consider increasing the frequency or amount if your budget allows. You can adjust your contributions throughout the year to accommodate changes in income or unexpected expenses.

· Make Incremental Increases - Gradually increase retirement contributions over time to dampen the impact on your current budget. Even increasing your contribution rate by 1% annually can result in substantial long-term growth. This works well if you receive salary increases - the additional funds can be directed to savings without reducing take-home pay.

If your employer offers an “auto-escalation” program to automatically increase your 401(k) contributions each year, enroll to ensure consistent growth in your savings. Even small, periodic increases can significantly enhance the compounding effect over time, leading to a larger retirement portfolio.

· Redirect Windfalls - Windfalls (bonuses, tax refunds, one-time financial gifts) provide an excellent opportunity to boost retirement savings. Instead of using the extra funds for discretionary spending, consider adding to your retirement savings. Many 401(k) plans allow lump-sum contributions up to the annual limit. This can help accelerate savings growth, especially if contributions are made early in the year due to compound growth over time.

· Adjust Tax Withholding - Consider adjusting your tax withholding to ensure you receive smaller refunds throughout the year, redirecting those funds to retirement contributions automatically. If your employer allows it, direct a portion of your bonus directly into your 401(k) before taxes are withheld.

· Regularly Review - Review your retirement savings strategy regularly to ensure it remains aligned with your goals. At mid-year, check account balances, contribution rates, and investment returns - and adjust if needed. Before year-end, confirm you have maximized your contribution opportunities (catch-up contributions if over age 50; employer matching contributions; etc.) and are taking advantage of tax savings opportunities. Some plans allow year-end lump-sum contributions to help reach annual limits using excess savings or windfalls.

Saving for retirement is an integral part of attaining financial security. This blog only addresses ways to maximize saving in employer-sponsored 401(k) and other group plans. There are additional strategies for IRAs; Roth accounts, and self-employed plans.

If you have questions about this topic, reach out to a financial professional. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.