What are the most common types of workplace retirement plans?
The most common employer-sponsored qualified defined contribution retirement plans are 401(k)s, Roth 401(k)s, 403(b)s, Roth 403(b)s, 457(b)s, Solo 401(k)s, profit-sharing plans, governmental 457(b)s, the federal government’s Thrift Savings Plan, and defined benefit plans. Less common and typically offered only by small businesses are IRA-based plans, such as SEP IRAs, SARSEPs, and SIMPLE IRAs.
How much can I contribute to my 401(k) or 403(b) plan?
The IRS changes the amount we can contribute to our defined contribution plan annually. For 2025, an employee can contribute up to $23,500 as elective deferrals. If the employee is 50 or older, there is a catch-up amount of $7,500 that you can contribute for a total of $31,000 in 2025. We recommend contributing at least the amount needed to participate in the full employer match, and ideally, increasing your contributions to the plan annually. Employers can contribute an additional amount as a match or profit-sharing contribution, for a total of $70,000 (not including catch-up contributions) in 2025. It is important to note that contributions are also limited by total compensation, so anyone earning less than $23,500 annually can only contribute up to 100% of their compensation. It is also important to note that you can continue to contribute to the workplace retirement plan as long as you are still working, even if you are over the age when required minimum distributions (RMDs) would be required.
What is new for 2025?
Beginning this year, the Secure Act 2.0, enacted December 29, 2022, added a higher catch-up contribution amount for employees aged 60, 61, 62, and 63 who participate in one of these plans. You will be eligible if you turn 60 at any time in 2025. If you turn 64 at any time in 2025, you will not be eligible for the additional catch-up. In 2025, the catch-up amount of $11,250 may be contributed instead of $7,500.
How can I maximize the benefits my workplace retirement plan provides?
There are a number of optional plan provisions that employers could choose to implement that may enhance the overall benefit for employees. Check to see if your plan allows for any of the following to make sure you are getting the most out of what your plan offers.
- Matching True-Up – A match is a percentage of what you contribute that your employer contributes on your behalf, up to a certain limit set by the plan. Your employer matches a set percentage of your contributions to the plan each pay period. If you decide to contribute the annual maximum to your plan early in the year, then you will not contribute to the plan for the rest of the pay periods throughout the year, and therefore would not receive a match. However, a true-up is an optional plan provision that a plan could adopt. After the end of the calendar year, the plan administrator would calculate if you contributed enough to get the maximum match; your employer would then contribute the missed match. The benefit of this provision is that even earners who “front-load” or contribute the annual maximum to their employer before the end of the year can still receive the full match from the employer. Since calculations cannot be completed until after the end of the year, the true-up contribution may not be made until months later into the next year.
- Mega Backdoor Roth – A plan could choose to adopt this optional plan provision to allow you to contribute after-tax contributions to the plan in addition to the annual maximum salary deferral limits. So, for 2025, in addition to the $23,500 maximum salary deferral, if your plan allows, you could choose to continue contributing (without the tax deduction) up to the total annual additions 415(c) limit of $70,000 (in 2025). The benefit of contributing above the tax-deductible limit is that you could then convert those after-tax contributions to Roth (assuming your plan allows it) to create what is known as the “mega backdoor Roth.” It is a way to build your Roth bucket (tax-free growth and tax-free distributions) at a much higher annual amount than the annual limit of $7,000 for Roth IRAs. Also, this allows for contributions even if you have earned more than the IRS income limits to be able to contribute to a Roth IRA. An important nuance is the total annual additions limit, which includes all contributions to your plan, including employer match, employer profitsharing contributions, and forfeitures (but does not include catch-up contributions or rollovers). What this means is you may find you inadvertently overcontributed, in which case you will likely be required to take a distribution for the overage.
- In-plan Self-Directed Brokerage Account – This optional provision allows employees to create a brokerage account linked to their 401(k) plan, allowing them to have a much larger pool of investment options. Rather than being limited to the funds that are available within the plan, employees who invest through the brokerage account typically can invest in most mutual funds, ETFs, stocks, and bonds. The plan sponsor may limit or exclude certain asset types that may have reduced liquidity or have too much perceived risk.
How should my 401(k) be invested?
Most employer plans have a set list of investment options. Selecting the right fund(s) for you depends on your tolerance for swings (up and down) in the market, and your time horizon for needing to withdraw from the account. Depending on the options you have to choose from, it may be best to select a target-date fund, or it may be best to select a few different funds. The important thing is to be invested in something, and most likely not the stable value fund. This fund is typically most equivalent to cash, which means you won’t have the potential to earn a return that the equity or bond market would provide. In order to take advantage of the power of compounding, the account needs to be invested.
How can Beacon Pointe help?
Beacon Pointe advisors now have the ability to link to and manage most employer-sponsored retirement plans. Research has shown that 90% of the difference in return (and risk) between two different portfolios is attributed to asset allocation.[1] Research continues to show that the average equity investor underperformed the S&P 500 by 5.5% (in 2023) and the average bond investor underperformed the Bloomberg Barclays Aggregate Bond index by 2.63% (in 2023).[2] A difference of even just 1.25% in annual market returns over a twenty-year period on a beginning account value of $300,000 could mean an additional $350,000.[3] In the same example, a difference of 2% annually means nearly $600,000 more in your ending account value.[4]
Connect with us if you are interested in learning more about maximizing the benefits and growth of your employer-sponsored retirement plan.
Important Disclosure: This material is intended for general informational purposes only. Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. This information is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Only a tax or legal professional may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement any design discussed herein. Nothing herein should be relied upon as personalized investment advice, nor should it be considered an individualized recommendation, offer or solicitation for the purchase or sale of any security or to adopt a specific investment strategy. An investor should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results. Beacon Pointe provides links for your convenience to other providers’ websites. Beacon Pointe is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve or endorse the information provided.
- Brinson, Hood, and Beebower, Determinants of Portfolio Performance II Study, Financial Analysts Journal, May/June 1991 chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://indexacapital.com/bundles/unaiadvisor/docs/papers/1991-Brinson%20Determinants-of-Portfolio-Performance-II.pdf
- chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.dalbar.com/Portals/dalbar/Cache/News/PressReleases/QAIB2024_PR.pdf
- Assuming contributing the maximum salary deferrals each year, assuming the difference between a 5% return and a 6.25% annual return
- Assuming contributing the maximum salary deferrals each year, assuming the difference between a 5% return and a 7% annual return
