With the new year, comes new opportunities to save and invest. This is a great time to take a fresh look at your 401(k) or 403(b) and see if you are taking full advantage of the tax laws. In 2025, the contribution limits for both plans have increased to $23,500. If you're age 50 or older, the IRA allows a "catch up" contribution of up to $7,500, bringing your total potential annual tax-deductible savings to $31,000 if you're able to defer that much income! That is assuming you have elected 100% to go into the pretax portion of the plan. In 2006, the Roth 401(k) and 403(b) were introduced. For participants that elect to have their income go into the Roth portion, they do not receive a current tax deduction on the contributions, but the growth of the account is completely tax free going forward.
From a planning perspective, I would normally suggest that a client defer any income that may be subject to the 22% tax bracket or higher, into the tax-deductible portion. If you are able to reduce your marginal bracket down to just 12% by making those tax-deductible contributions, then I would be more inclined to flip to the Roth side of the plan and pay that 12% tax. Of course, financial planning is not a perfect science, since so much can change from life events to tax laws, but I assure you if you take control of your saving and investing, your future self will be very grateful you did.