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February 26, 2025
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Hoxton Blog • How to Maximise Your 401(k) Contributions Throughout the Tax Year
With the 2024 tax deadline now in the rear-view mirror, it’s time to turn our attention to the new tax year. You might be surprised to hear that now is the time to make the most of your 401(k) contributions, even though December 31st is many months away.
Maximising your contributions can reduce your taxable income (meaning less income tax — and who doesn’t want that) while growing your retirement savings. It’s simply one of the most effective strategies for when it comes to planning for retirement.
With annual limits, catch-up contributions for those aged 50 or over, and tax advantages, taking full advantage of your 401(k) before the year ends are a ‘no-brainer’. In this article, we’re looking at the benefits of maximising your 401(k) contributions, the practical steps you can take to do it, and considerations for US expats overseas.
401(k) are accounts designed for the specific purpose of helping you save for retirement. Any contributions are made on a pre-tax basis, meaning the money you contribute reduces your taxable income in the year it’s made. If you’re in a higher tax bracket, this can mean significant savings right away.
The benefits compound from there, literally, as 401(k) accounts are tax deferred. This allows the investments held within them to compound without any tax drag, with tax only payable once withdrawals are made in the future.
While many people wait until the end of the tax year to make the bulk of their 401(k) contributions, starting early can allow you the potential to achieve almost an extra year of investment returns and it can give you more time to plan to maximise your contributions for the year.
For 2025, the annual contribution limit is $23,500 for those under 50. If you’re 50 or older, you can make more catch-up contributions, but for the 2025 year these have become a little more complicated. Here are the details:
Age |
Maximum 401(k) catch up contribution |
Total maximum 401(k) annual contribution |
Under 50 |
$0 |
$23,500 |
50 to 59 |
$7,500 |
$31,000 |
60 to 63 |
$11,250 |
$34,750 |
64 and over |
$7,500 |
$31,000 |
Making the most of these limits before the tax deadline allows you to take full advantage of both the savings potential and the tax benefits. Here are the steps you need to take to do it:
First, you need to confirm how much of these contribution limits you’re already using. Start by reviewing how much you’ve already contributing to your 401(k) this each month. Many people contribute a set percentage of their salary, but you may have some additional room in the cap.
If you’re not on track to use up your entire allowance, consider increasing your contributions for the final months of the year to reach the cap. You can even begin to set this money aside in a separate account if you’re not sure whether you might need it throughout the year. If you don’t end up using it, you have extra funds ready to contribute.
For those who receive bonuses or commissions, distributing a part of it to your 401(k) can be a terrific way to boost your savings while lowering your taxable income.
Who doesn’t love free money? No one, and that pretty much exactly what employer matching contributions. However, many employees don’t contribute enough to receive the full match. If that’s you, you’re leaving that free money on the table.
For example, if your employer matches 50% of contributions up to 6% of your salary, not contributing at least 6% means not just missing the added contributions towards your retirement but missing all the years of compound growth on that money too.
Be sure to check your company’s policy so that you can maximise your employer matching throughout the year.
As mentioned above, if you’re 50 or older, the IRS allows contributions beyond the standard limit. This is often the time when you have the most financial flexibility. Any children are likely to be more financially independent, your mortgage will be paid off or more manageable than it was 20 years ago, and your earning capacity in your career will be near its peak.
If you’ve got room in the caps and cash to spare, you should work out how maximising catch-up contributions in the lead up to retirement can help you reach your financial goals sooner.
Many employers offer both Traditional and Roth 401(k) options. While Traditional 401(k) contributions reduce taxable income today but attract tax on withdrawal, Roth 401(k) contributions grow tax-free for retirement, but don’t offer you a reduction to your taxable income now.
Great financial planning is about having multiple options, and spreading your contributions between both accounts can offer you flexibility in how you save for retirement, and how you access funds once it happens.
This can all be done manually each year, but automating the contribution process can make planning easier and make it more likely that you’ll stick to your strategy. Especially if you’ve struggled to contribute consistently, automating 401(k) deductions means that retirement savings are still a priority, without you having to think about it.
Setting automatic contributions for the rest of the year can prevent last-minute scrambling before deadlines.
We’ve talked a lot about maximising your 401(k) contributions here, but that doesn’t mean it’s the only financial strategy you should consider. Everyone’s financial situation is different, and you need to consider the big picture of your retirement plan and financial strategy when deciding what to do.
Perhaps you have an incredibly attractive employee share option package you can take advantage of. Or maybe you have some higher interest debt you need to pay off. It’s important to understand the benefits that come with 401(k) deductions, but to keep them in context of your broader plan.
This may seem like a lot of information, so here’s your quick checklist to review:
While you can wait until just before the tax deadline to arrange your contribution strategy, the sooner you do it the more opportunity you have for your funds to begin to compound with added growth and income.
It’s never too early in the year to start automating your contributions, diversifying your investments, and reviewing your tax strategies. Not only can it get the financial ball rolling early, but it gives you plenty of time to review and ensure you’ve maximised your contributions for the year, without a last-minute mad panic.
At Hoxton Wealth, we specialise in helping our clients with retirement planning and tax-efficient investing. Whether you need guidance on 401(k) contributions, UK tax and pensions, or your retirement planning strategy, our experts are here to help.
Contact us today to develop a personalised financial plan.
If you would like to speak to one of our advisers, please get in touch today.
Hoxton Wealth
February 26, 2025
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