401(k) Plans
401(k) Plans
If the following comment from your CPA sounds familiar to you, then your CPA is similar to most clients we talk with:
- “Put money in your 401(k)/Profit Sharing Plan and pay taxes on the rest. If you want to take home more money, you need to make more money.”
401(k) contribution limits
Many individuals assume that tax planning begins when they meet with their CPA to prepare their tax return. In reality, the greatest tax-saving opportunities are often identified throughout the year, before tax returns are ever filed.
CPAs play a critical role in ensuring tax returns are accurate and compliant with ever-changing tax laws. However, because their primary responsibility is tax preparation and compliance, they may not always have the opportunity to meet with every client to develop a comprehensive, long-term tax reduction strategy.
By working together with a qualified financial professional, tax attorney, and CPA, individuals can often uncover additional opportunities to reduce taxes while pursuing their long-term financial goals.
One of the most widely used and effective tax-advantaged retirement strategies is the 401(k) plan.
A 401(k) plan is an employer-sponsored qualified retirement plan that allows employees to contribute a portion of their compensation through automatic payroll deductions. Contributions are generally made on a pre-tax basis (or as Roth contributions if the plan permits), allowing participants to save for retirement while potentially reducing their current taxable income.
Participation is voluntary, and many employers encourage retirement savings by offering matching contributions. While matching formulas vary by employer, a common example is matching 50% of employee contributions up to 6% of compensation.
The IRS periodically adjusts 401(k) contribution limits for inflation. For 2026, employees may contribute up to $24,500, with an additional $8,000 catch-up contribution available for individuals age 50 and older, for a total contribution limit of $32,500. Individuals ages 60 through 63 may qualify for an enhanced catch-up contribution under current IRS rules, allowing them to contribute even more during those years.
The following table summarizes the annual 401(k) contribution limits.
| 401(k) contribution limits | Employee | Deferral Limit | Catch-Up | Total Age 50+ |
|---|---|---|---|
| 2025 | $23,500 | $7,500 | 31,000 |
| 2026 | $24,500 | $8,000 | 32,500 |
Beginning in 2025, employees who turn 60, 61, 62, or 63 during the calendar year may qualify for a higher catch-up contribution of $11,250. That makes the maximum $34,750 for 2025 and $35,750 for 2026
Are Qualified Plans Tax-Hostile or Tax-Favorable?
While most people think it’s a good idea to fund a “tax-deferred” qualified retirement plan; many times that’s NOT the case. In fact, tax-deductible qualified retirement plans can be more tax-hostile than tax-favorable.
You may have had someone ask you if it is better to pay taxes on the harvest or the seed? What this question is asking you is whether it is a better idea to pay income taxes now on your current income (the seed) if you could let that money grow tax-free and be removed tax-free later in retirement, or is it a better idea to let your money grow tax-deferred for the year in a qualified retirement plan and then pay income taxes on ALL of the money that is withdrawn (the harvest).
We’ve run the numbers and for many clients under the age of 60, paying taxes on the seed while letting your money grow tax-free and come out of a wealth-building tool tax-free in retirement will be better than simply income tax-deferring money the traditional way through a 401(k) or other tax-deferred qualified plans.
Click here to learn how you can build a tax-favorable retirement nest egg outside of a qualified retirement plan.
If your estate plan is not in order and you would like help from our firm and its affiliate partners, please click here to email us or phone (805) 402-9536. To sign up for a free consultation or to just get more information click here.