A secret to retirement success

“Set it and forget it!” You’ve probably been advised to do just that when it comes to your 401(k) account. And yes, frequently making changes to a thoughtfully invested portfolio can take you dangerously offtrack from your retirement goals. But so can never making changes.

A secret to successfully saving for retirement is reviewing your 401(k) contribution strategy at the start of each year. Your evolving financial circumstances and different life stages may offer opportunities to optimize it. After all, we get married, have children, get raises, change jobs – the list goes on.

What happened in your life last year (or the years before) that should be factored into your 2025 contribution strategy?

The wider availability of Roth accounts on 401(k) platforms means more opportunity to tailor your contributions, but it also can mean complex decisions between a pretax and a Roth 401(k) or creating a combination of both. In addition, the IRS typically makes changes to contribution limits each year and there may be new laws that impact how we save for retirement.

It’s already February, so before it’s too late, see if you should make changes to your 401(k) contributions this year.

New contribution limits in 2025

First, consider the changes to the contribution limits in the table below.

Note that for the first time, those age 60 to 63 were carved out to receive a particularly high catch-up contribution of $11,250. You should always max out your contributions if you can, so this new limit gives you an opportunity to increase your 401(k) contributions if you’re in this age group.

Also, if you make above $145,000 in 2025, here’s a SECURE 2.0 Act mandate you’ll need to consider: All 401(k) catch-up contributions starting in 2026 need to be made to a Roth account for those with gross incomes above $145,000 in the previous year.

Roth vs. Pretax

Ultimately, the decision on whether to contribute to a pretax or a Roth 401(k) or a combination of both can be a complex one, regardless of your salary level.

As a quick reminder: The big advantage of a Roth account is that you won’t have to pay taxes on qualified distributions in the future because you pay taxes up front on the contributions. A big driver of the decision is whether it makes sense to pay income taxes on your contributions now or to contribute to a pretax 401(k) and pay income taxes on distributions later. It may end up making sense for you to have either one or both account types at different life stages.

Look beyond the rules of thumb

When you review your contribution strategy, you may think you already know what strategy makes sense, but as you account for regulatory changes and recent changes to your financial circumstances, you may quickly discover that a different strategy is warranted.  

To get you started, we use the examples below to illustrate how this can happen.

Example 1: Start of career

• A recent college graduate in STEM with a $72,000 salary
• No dependents or charitable contributions

The example above illustrates a recent grad early in her career in technology. Does your child, grandchild or other family member come to mind? One of the most important times to review your contribution strategy is when you’re first starting out.

It typically makes sense to pay taxes on contributions to a Roth account if you believe your taxes will be higher when you plan to take distributions. One would think the start of your career is one of those times, but pretax contributions could make sense too, and here’s why.

The STEM grad had previously decided to save 10% of her salary to a pretax 401(k), which would have put her in the 22% federal tax bracket. But as she took a closer look, she realized that if she contributed 12% of her salary, she could push her tax bracket down to 12%, using mostly pretax money to shelter income, while still being able to put some earnings in a Roth.

If she can save more than 12%, it would be appealing to save that extra amount in a Roth account because she may not see the 12% tax bracket again for a very long time.

Example 2: Divorce

• A freshly divorced empty nester in his mid-50s faces 2025 as a single tax filer
• He had been maxing out contributions and dividing them between pretax and Roth accounts
• Has $240,000 salary and had been filing jointly with spouse, whose salary was $175,0000

What impact could this man’s newly single status have on his contribution strategy? If he kept his current strategy, which includes Roth contributions, he would remain in the 32% federal tax bracket that he and his wife were in when they filed jointly.

As it stands, previous Roth contributions were likely misguided to begin with. He’s at a stage where his career earnings are starting to peak, so his taxes may be lower in the future. It may make sense to max out contributions using only his pretax 401(k) ($31,000, with the catch-up). That could push down his taxable earnings to the 24% tax bracket, after the $15,000 standard deduction.

Example 3: Early retirement

• Married couple, both aged 60, with $150,000 salaries each in 2024
• Both have been maxing out their pretax contributions for years 
• One of the spouses quits their job to transition into part-time retirement, but takes a break in 2025
• Couple tightens their belts in 2025 rather than dip into savings

You may assume that those working in their early 60s also would be at their peak earnings and a Roth would not make sense. But this example creates another possibility. The spouse that quits their job is taking a year off before finding part-time work. Because it’s a transition year, the couple decides to live off one salary and temporarily spend less money.

This couple has been maxing out their contributions in pretax 401(k) accounts for years, so their portfolio income and Social Security could put them in the same or higher tax bracket in retirement than they’re in during the transition year. It could make sense for the working spouse to make all contributions to a Roth 401(k) in 2025.

Next steps

The details of the above examples are less important than the broader takeaway, which is you should review your 401(k) contribution strategy to make sure it’s optimized for your current financial situation. Call your planner if you need help determining what your 401(k) contributions should look like this year.