Hey, want to hear something exciting?
The IRS just gave us an early gift for 2026: higher maximum contribution limits for retirement accounts, like a 401(k) or Roth IRA!
If that doesn’t excite you… you’re reading the wrong blog.
For those of us who read (and write) personal finance blogs, maxing out our retirement accounts is a top priority.
Remember, our saving rate is the one thing we can truly control when it comes to investing.
Once we’ve committed ourselves to improving our saving rate, the next big question is what we should do with the money we’re saving.
That leads us to today’s refresher on the two most popular types of retirement accounts: the 401(k) and the Roth IRA.
With many lawyers and professionals earning raises and bonuses towards year-end, this is the perfect time to check in on your annual retirement contributions.
The last thing you want to happen is for that extra, hard-earned money to go to waste.
Plus, if you prioritized other financial goals earlier in the year, it’s not too late to increase your contributions in 2025 to the maximum level.
This is exactly what I did recently. Having made good progress on my other 2025 money goals, I adjusted my 401(k) contributions to hit the maximum for 2025.
A 401(k) is likely the first investment account you will have.
401(k) plans are employer-sponsored retirement plans.
Employees can elect to participate in their company’s 401(k) plan and choose from a variety of investment options, usually mutual funds and index funds.
Most of us get our first exposure to the stock market through a 401(k) plan. The main exception is if you had a parent or relative open an investment account for you before you started working full-time.
There are four major reasons to invest in a 401(k) plan.
Let’s take a look at four major reasons to invest in a 401(k) plan.
1. You can invest with pre-tax dollars.
When you invest in a traditional 401(k) plan, you are contributing pre-tax dollars. This is a great way to lower your taxable income in the year you contribute.
For example, if you earn $100,000 per year and choose to contribute $10,000 to your 401(k), you have reduced your taxable income to $90,000. That’s an immediate tax savings for you.
At the same time, you can invest that entire $10,000 without having to pay any taxes on that amount in the year you contribute.
That means more money for investments rather than taxes. When you have more money invested, you can obviously earn more in returns. That’s the magic of compound interest.
2. Your contributions are automatic.
Once enrolled in a 401(k) plan, your employer will automatically deduct money from your paycheck and invest it directly into your investment selections.
Because the money never hits your checking account, you won’t be tempted to spend it on things you don’t really care about.
You also don’t have to worry about consistently making transfers into your account because it will happen automatically.
It’s like having a forced savings account where you don’t have to do anything at all. It doesn’t get easier than that.
3. Your earnings grow tax-free.
In addition to not being taxed on your contributions like we discussed above, you also won’t be taxed on your earnings.
That’s a double tax advantage that acts to magnify the power of compound interest.
Keep in mind that you will be taxed when you make withdrawals later on.
Let that marinate for a minute. If you start contributing in your 20s and don’t withdraw from your 401(k) until your 60s, that’s 40 years of tax-free, compounded growth.
This is a major incentive to invest in a 401(k), even more so than the ability to reduce your taxable income in the year you contribute.
Rest assured, if you’re maxing out your 401(k), you can just roll your eyes the next time you hear someone complaining about taxes.
You shouldn’t worry because you have investments that will grow for decades without any tax liabilities.
4. Your employer may offer a match.
Many employers today offer a match to incentivize employees to contribute to their 401(k) plans.
To qualify for the match, you must be participating in your company’s plan and make contributions yourself. The match is usually a percentage of your overall salary, usually between 3-6%.
For example, if you contribute 5% of your salary, your company may match you with an additional 5% contribution.
If your company offers a match, it’s a no-brainer to take advantage of that match.
This benefit is so good that the employer match is often described as “free money.”
I agree with the sentiment, but I don’t like the term “free money.”
That’s because it implies that you have not earned that money as an employee for your company. If you’re a lawyer or professional, you spend countless hours away from your family to work a hard job. The employer match is compensation for your efforts.
I prefer to think of the company match as a bonus you’ve rightfully earned.
The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.
401(k) Contribution Limits for 2026
The IRS recently increased the maximum contribution that an individual can make in 2026 to a 401(k) plan. The new limits are $24,500, up from $23,500 this year.
That means people earning $100,000 in 2026 can reduce their taxable income by nearly 25% if they max out the contribution. That’s huge, immediate savings.
People aged 50 and over may be able to contribute even more, up to $8,000 more next year, up from $7,500 this year.
Additionally, people between the ages of 60 and 63 will be allowed catch-up retirement plan contributions of up to $11,250 annually.
A Roth IRA is another key retirement account that offers double tax benefits.
A Roth IRA is another type of retirement account that also provides double tax benefits.
Unlike a 401(k), you make after-tax contributions to your Roth IRA. That means you don’t get any immediate tax breaks.
However, you don’t have to pay any taxes when you withdraw the money (after age 59 1/2). This is the major perk of a Roth IRA.
Additionally, just like a 401(k), your Roth IRA grows tax-free.
As another bonus, you can withdraw your contributions tax-free and penalty-free at any time. Keep in mind there are penalties if you make withdrawals from your earnings before the age of 59 1/2.
Why think about opening a Roth IRA?
For many investors, it’s not a bad idea to consider opening a Roth IRA in addition to your 401(k).
For starters, there are contribution limits to each account. You may need more money in retirement than just what your 401(k) plan will provide. Investing in a Roth IRA at the same time is a way to boost your retirement income.
For another reason, as discussed, 401(k) plans and Roth IRAs are treated differently from a tax perspective.
Many retirees like having a Roth IRA in addition to their 401(k) so they have access to some tax-free money in retirement.
Include me in that camp. I agree that it is beneficial to have some tax-free income in retirement from a Roth IRA to go along with your taxable income from a 401(k).
You can open a Roth IRA with any number of investment companies, like Vanguard, Fidelity, and Charles Schwab.
Roth IRA Contribution and Income Limits for 2026
Just like with the 401(k), the IRS also raised the 2026 annual contribution limits for Roth IRAs. The limits in 2026 increased to $7,500, up from $7,000 this year.
The IRA “catch-up” contribution limit also increased to $1,100 in 2026.
There is a catch when it comes to Roth IRAs. Because of the amazing tax advantages, there are income limits associated with who may contribute to a Roth IRA.
As explained by the IRS for 2026:
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $153,000 and $168,000 for singles and heads of household, up from between $150,000 and $165,000 for 2025.
For married couples filing jointly, the income phase-out range is increased to between $242,000 and $252,000, up from between $236,000 and $246,000 for 2025. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
Are you on track to hit your retirement planning goal for 2025?
There are only so many ways to invest in tax-advantaged accounts. The most savvy investors make sure that they are receiving as many tax benefits as possible.
The 401(k) and Roth IRA are two of the most popular, and two of the only, ways to invest for retirement with incredible tax advantages. That’s why they are so important to fund during your working years.
If you want to max out your accounts, there is still time in 2025, especially if you recently earned a raise or a bonus. Put that hard-earned money to good use. Don’t let the dollars disappear.
Then, as 2026 begins, with the new limits in place, you may want to adjust your contributions so you can continue to hit the max level in your 401(k) and Roth IRA.
Have you checked in on your retirement contributions lately?
Are you planning to increase your contributions to hit the max level in 2025?
What about in 2026?
Let us know in the comments below.
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