Give your 401(k) a boost in 2025

With this news, it seemed like a good time to do a deep dive on 401(k) accounts. With the right plan, contributions, and investment strategies in place, a 401(k) gives you an excellent way to save and invest for the future.  

And like any kind of investment, you have plenty of options and points to consider before you get started. Different tax benefits, contribution limits, and investment strategies all come into play – both when you enroll and as you keep up with it over the years.

We’ll cover all that here – but first, let’s get into how a 401(k) works.

401(k) basics

A 401(k) plan is a company-sponsored retirement account, and there are two main ways money gets into it:

•         You can put in a portion of your income, up to certain limits each year.
•         Many employers match a portion of what an employee puts in, which we’ll cover shortly.

Altogether, the money that ends up in a 401(k) plan are called contributions. And yes, there are limits to how much you can save each year, which is where those new 2025 limits come in – $23,500 for those under 50 and $31,000 for those over 50. You can contribute any amount from $0 up to those limits. Typically, you choose to contribute a percentage of your pay, but some companies let you throw in a flat dollar amount.

If you're between 60 and 63 as of December 31, 2025, you’ll be able to make a catch-up contribution of $11,250 starting in 2025. And if you’re between the ages of 50-59, or 64 and older, you're still eligible for a $7,500 catch-up contribution.

How your company might contribute to your retirement.

You’ll often hear a company’s contribution to your 401(k) called an employer match. Many companies match your contribution in a dollar-to-dollar way, up to a maximum percentage. Not all companies make contributions, but, if they do, any employer matching doesn’t count towards your annual limit. In all, it gives your 401(k) an extra boost at no extra cost to you.

Now, if employer matching sounds like a good deal, that’s because it absolutely is.

For example, let’s say your company matches your savings on a dollar-for-dollar basis up to 3%. If you contribute 2%, they will match 2% to your 401(k). Contribute 3% and they will contribute 3%. Basically, that match is like extra income that goes straight toward your retirement.

Many people make sure to take full advantage of this matching by contributing the same percentage of the maximum match. But it’s indeed a maximum. Contribute 10% in this example? Your employer still only contributes 3%.

Other types of employer contributions come from profit sharing. Unlike an employer match, profit-sharing contributions aren’t tied to how much you contribute. These are called “non-elective contributions.” Still, it’s extra income toward your retirement. The company just contributes to it in a different way.

One important thing to keep in mind about employer contributions is this – that money might not be yours right away. You might have to work at your company for a certain amount of time before that money becomes entirely yours. This is known as a vesting period. Matching and vesting schedules vary by plan, so check with your company.

So, how much should you contribute to your 401(k)? That’s a great question for your planning team. The answer is different from person to person. Typically, contributing enough to max out that employer match is a great way to go. It’s practically free money, which is tough to pass up.

The right amount depends on a lot of things, like where you are in life, what your other priorities are, and your retirement goals. Again, reach out to your planning team about how much you should put into your 401(k) each year. They can answer that question with your overall finances in mind – because it’s totally a “big picture” kind of question.

The inevitable: 401(k)s and your taxes.

Another big thing to consider about your 401(k) is taxes. In fact, it calls for an up-front decision when you choose your 401(k) plan.

You might have the option to choose between two types of 401(k)s – a traditional or Roth 401(k). Each one handles taxes on the money you contribute differently, and each one handles taxes differently when it comes time to take that money out.

• A traditional 401(k) involves what’s called pre-tax contributions. You don’t pay taxes on your contributions today, but you’ll pay taxes on your money (and any growth) when you withdraw it.
  • For example: If you make $100,000 and save $10,000 to your 401(k) in a year, you’ll only pay taxes on $90,000 of annual income because of that $10,000 pre-tax contribution. But you will pay taxes on that 10k (and any growth it had) when you take it out in retirement.
• A Roth 401(k) flips that around. You pay taxes on your contributions today, but your savings (and any growth) aren’t taxed when you pull the money out in retirement. Note that not all plans allow Roth contributions.
  •  For example: If you make $100,000 and you save $10,000 to your plan, you’ll pay income taxes on the full $100,000 today. But you won’t pay taxes on that 10k (and any growth it had) when you take it out in retirement.

Which contribution type is right for you? That’s where your team comes in. If you have the option of choosing a traditional or Roth 401(k), bring it up with your planning team when you chat with them. They can point the way, once again with your big picture in mind.

Broadly, though, the answer depends on a few things, including:

•         Any retirement savings you have already.
•         Other investment accounts you have.
•         And your tax rate today compared to what you think it’ll be when you retire.

Generally, if you think your tax rate will be lower when you retire, you can save on taxes now and pay them later. If you think the opposite is probably true, use the Roth option and pay taxes now so you don’t pay them later when your tax rate is higher. Still, this isn’t a decision to take lightly. Talk with your planning team.

One more note about Roth 401(k)s and taxes before we move on: employers make their contributions on a pre-tax basis. So even if you made 100% of your contributions to a Roth, you can still end up with pre-tax contributions if your employer paid into it.

How to find the right investment strategy for your plan.

So, you’ve selected a plan. Now, how do you make that money grow over the years?

While 401(k)’s can offer a variety of investment options, they typically  revolve around a list of mutual funds. A mutual fund is an investment managed by a professional fund manager. The fund manager collects money from multiple people (investors) to buy groups of stocks, bonds, and other assets.

This approach benefits many investors in a big way. It gives them a diversified portfolio without having to pay a hefty price for loads and loads of different individual stocks. You get a piece of all their action at a fraction of the price. So, in a way, think of a mutual fund as an all-star team. You get strength and diversity in your investment from all kinds of heavy hitters all in one place.

Keep in mind, though, you don’t own individual shares of those stocks and investments. Instead, you equally share the profits and losses from the fund’s overall holdings. This is why they are called “mutual” funds. In that way, Apple might be in your mutual fund, but you don’t own individual shares of Apple. It’s just part of your mutual fund mix.

As far as mutual funds go, you might have a few types to choose from, which fall into two broad categories:

Individual mutual funds

Most 401(k) plans offer a group of funds you can choose to put your money into, called a fund lineup. Options in that lineup can include U.S. stocks and bonds, international stocks and bonds, funds that follow stock market indexes, and even funds that let you invest in real estate. Some 401(k) plans let you select from pre-set mixes of different funds, like say 50% U.S. stocks, 25% bonds, and 25% international stocks.

For people new to investing, it can feel like … a lot. It means choosing which individual mutual funds to invest in. And it means planning to adjust those investments for lower risk as retirement approaches.

Retirement (Target Date) funds

Target date funds take care of most of the investment strategy and planning for you.

Typically, you pick one fund based on your estimated retirement date (say, 2040). Then the fund diversifies your money across multiple mutual funds that automatically change over time. Usually, the mix of investments in the fund are adjusted to reduce your risk over time.

Once again, if your plan offers this as an option, have a talk with your planning team for the best approach. And picking the right one will look something like this:

• First, look at your options – traditional, Roth, and what kind of funds are available for investment.
• Second, think about how many years you have to go before retirement, your risk tolerance, and any other investments you have.
• Third, look for low cost options.

That last point is very important, particularly if you still have many years to go before retiring. It’s so important, we have our own article totally dedicated to investment costs. We recommend giving it a read, but the big headline is this – investment costs can eat into your investment returns, potentially to the tune of hundreds of thousands of dollars over the long term. You and your planning team will definitely factor that in as you choose where to put your money.

Side note: some 401(k) plans also have other investment options like company stock, so check with your employer to see if that’s an investment option for you.

Your 401(k) and your big picture.

Like many people, your 401(k) will probably make up a big part of your retirement savings. Here’s the important thing to remember: keep on top of your 401(k). It’s not a “set it and forget it” kind of investment. Not at all.

Review your strategy each year. Check and see if you need to adjust your investments, savings, and contributions. Also, look around and see what’s changed. Like the economy. Are stocks super volatile? Maybe it’s time to think about bonds. Are international markets booming? Maybe it’s time to move money there. Has your tax situation changed? As we saw, you might have to adapt to that too.   

Overall, you can reach out to your planning team to discuss allocation strategies. They can help advise you on how much you can contribute each year. The 401(k) decisions you make today can lead to significant improvements both now and in retirement.

I am Brent Weiss, CFP®, Facet’s Co-Founder and Head of Financial Wellness. Facet Wealth is an SEC Registered Investment Advisor. The information provided is for educational and entertainment purposes and is not meant to be investment, financial, tax or legal advice. Investments have risks and there are no guarantees. Past performance is not a guarantee of future performance.