Did you know that where you save your money can be just as important as deciding how much money to save each year?  If you are still in the working stage of your life (i.e. not retired), one of your annual financial goals should be deciding how much you are going to save for retirement during the year.  Once you figure out how much you can save, your next question should be, “Which bucket should I save my money in?”  Making the wrong choice can cost you in the long run, either in unnecessary taxes, missed employer benefits, or reduced after-tax investment growth.

At DHJJ Financial Advisors, we specialize in helping individuals navigate their retirement savings strategy, ensuring they maximize tax advantages and employer benefits while planning for a financially secure future.

In this article, we’ll break down the 2025 contribution limits for IRAs and 401(k) plans, compare Traditional vs. Roth savings options, and help you determine which account makes the most sense for you based on your financial situation.

Traditional IRA vs. Roth IRA: Key Differences and 2025 Contribution Limits

Traditional IRAs and Roth IRAs are two common types of self-directed retirement accounts a taxpayer may be eligible to contribute to during the year.  You’ve likely heard of both types of accounts, but do you fully understand their differences and whether you’re eligible to contribute?  Let’s go through the basics of each type of account as well as the 2025 annual contribution limits.   

Taxpayers can contribute to traditional and Roth IRAs only if they (or their spouse) have earned income.  These are self-directed accounts, meaning they are set up by the individual and not an employer.  Any taxpayer can contribute to the extent they are eligible as outlined below:

• Any taxpayer that has earned income can contribute to a traditional IRA up to their earned income or the individual annual limits, whichever is higher.
• There are no upper income limits on traditional IRA contributions.  However, tax deductibility of traditional IRA contributions depends on the taxpayer’s (and spouse’s) coverage under employer plans and income limits, with deductibility being phased out based on filing status and modified adjusted gross income (MAGI).  Check out the 2025 limits here.
• Roth IRA contributions are never tax deductible.  In addition, Roth IRA contributions are subject to income limits, which phase out based on your filing status and MAGI.  Later in this article, we will discuss when you may want to consider contributing to a Roth account vs. a Traditional account (assuming you are eligible for both based on income limits).
• Taxpayers have until the tax filing deadline to make their IRA contributions for the year.  For example, a 2025 IRA contribution needs to be made by 4/15/2026 to be an eligible contribution for the 2025 tax year.

The 2025 IRA contribution limits are the same as they were in 2024.  The limits are as follows:

• Individual Contribution Limit: $7,000 for individuals under 50.
• Catch-Up Contribution Limit: $1,000 for individuals 50 and older, bringing the total contribution to $8,000.

The above limits apply to the total a taxpayer can contribute to both types of IRA accounts, combined.  For example, if a 40-year-old taxpayer contributes $2,000 to their Roth IRA, they would be able to contribute $5,000 to their traditional IRA for a combined total of $7,000 for the 2025 tax year. 

401(k) Plans Explained: Contribution Limits and Employer Benefits

Before deciding where to save your money, check whether your employer offers a sponsored retirement plan, such as a 401(k), the most common option. If you’re eligible to contribute, a 401(k) can be a powerful savings tool, allowing you to invest significant funds throughout the year based on your financial situation.

For the 2025 tax year, the IRS has increased the contribution limits to account for inflation. Here are the limits for 2025:

• Employee Contribution Limit: $23,500 for individuals under the age of 50
• Catch-Up Contribution Limit for Ages 50 and over: $7,500 for individuals aged 50 and older.  This allows those nearing retirement age to save more.
• Additional Catch-Up Contribution Limit for Ages 60-63: $3,750 for individuals aged 60-63.  Individuals will need to check with their plan sponsor to make sure this is allowed within their plan.

These limits apply to both traditional and Roth 401(k) contributions. If you contribute to both types of accounts, the combined amount you can contribute is reflected in the above amounts.

Should You Choose a Roth or Traditional 401(k)? Pros, Cons, and Tax Benefits

The main difference between a traditional 401(k) and a Roth 401(k) lies in when you pay taxes:

• Traditional 401(k): Contributions are made with pre-tax dollars, meaning your taxable income is reduced in the year you contribute. You will pay taxes on withdrawals (contributions plus earnings) during retirement.
• Roth 401(k): Contributions are made with after-tax dollars, meaning there is no tax deduction upfront. However, qualified withdrawals (contributions plus earnings) in retirement are tax-free.

Deciding between a Roth and traditional 401(k) depends on your current and expected future tax rates.

When to Choose a Roth 401(k):

A Roth 401(k) is most beneficial for taxpayers who expect to be in a higher tax bracket in retirement than they are now. Here are some benefits to consider:

1. Tax-Free Withdrawals in Retirement: If you anticipate your income increasing over time and believe you will be in a higher tax bracket when you retire, paying taxes now (at a lower rate) and not paying any tax later can result in substantial savings.
2. Long-Term Growth: The Roth 401(k) allows your contributions and earnings to grow tax-free. This is particularly advantageous for individuals who expect their investments to appreciate significantly over time.  Age also plays a factor.  The younger you are, the more time your assets have to grow tax-free.
3. Estate Planning:  A Roth 401(k) can be a smart for those planning to pass on wealth to heirs. Since the withdrawals are tax-free, they provide a tax advantage to your beneficiaries.

When to Choose a Traditional 401(k):

On the flip side, a traditional 401(k) is ideal for individuals who expect to be in a lower tax bracket in retirement. Here is when a traditional 401(k) might make sense:

1. Tax Deduction Now: Contributions to a traditional 401(k) reduce your taxable income for the current year, meaning you will pay less in taxes in the short term. This is beneficial if you want to reduce your taxable income today and expect to pay taxes at a lower rate in retirement.
2. Employer Match: If your employer offers a match for contributions, it is typically made to a traditional 401(k), and you will not pay taxes on the matched funds until you withdraw them in retirement.
3. Predictable Tax Impact in Retirement: If you believe your income in retirement will be relatively stable and lower, a traditional 401(k) ensures that you’re deferring taxes until you’re in a more favorable tax situation.

Choosing the Best Retirement Savings Strategy for 2025: Next Steps

Choosing between a Roth 401(k), Traditional 401(k), Roth IRA, or Traditional IRA can have a significant impact on your long-term savings and tax liability.  By understanding the contribution limits and tax implications of each, you can make an informed decision that aligns with your financial future.

Many people struggle with knowing where to put their money. Should they take advantage of tax-free withdrawals with a Roth, or reduce their taxable income now with a Traditional account? The right choice depends on a solid financial plan and a clear understanding of your current and future tax situation.

Building out a financial plan can project what your tax situation is right now vs. in retirement.   With careful planning, you can maximize the tax advantages of your retirement contributions, making the most of your savings for years to come. 

At DHJJ Financial Advisors, we believe in building your wealth around the plan.  Whether you’re optimizing your retirement contributions or strategizing for tax efficiency, our team is here to guide you. Let’s start planning for your financial future, reach out today.

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