Retirement planning: how much income to squirrel away for the future? Year-end is when participants … [+]
The IRS just released the 2025 contribution limits for qualified retirement plans, such as your 401(k) plan. Knowing those limits, which are adjusted annually for inflation, is crucial for the many employees and executives who participate in company nonqualified deferred compensation (NQDC) plans. Year-end is when most of them make like an autumn squirrel and choose how much of next year’s pay to put away for the future.
Generally, you defer income via nonqualified plans only when you know you will max out your yearly contributions to qualified plans, such as your 401(k). If you’ve already maxed out your qualified plan contributions for 2024, you will probably do the same in 2025, so you will need your NQDC plan to defer any salary and bonus increases you expect in 2025. You may have an additional incentive to defer taxable income if you believe you will be in a higher income-tax bracket in 2025 than you are in 2024.
Further down the line, the outlook for federal tax rates themselves is unclear beyond 2025. The Tax Cuts & Jobs Act (TCJA), which established the current tax law in 2018, is scheduled to expire after 2025. It is up to Congress and the next president to decide whether the tax law will be extended, keeping the current tax brackets and rates, or replaced with new tax legislation that has a different structure.
2025 IRS Contribution Limits For Qualified Plans
The IRS inflation adjustments from 2024 to 2025 are fairly typical, unlike the prior bigger adjustments made in response to higher inflation. Below are the key annual contribution limits for qualified retirement plans in 2025, with the 2024 limits in parentheses:
Elective compensation deferrals, such as 401(k) and 403(b): $23,500 (up from $23,000)
Compensation limit in calculation of qualified deferral and match: $350,000 (up from $345,000)
Catchup contribution for people aged 50 or older: $7,500 (no change)
Total defined contribution limit (employee and employer contributions): $70,000 + catchup contribution (up from $69,000 + catchup)
Defined benefit plan payout limit: $280,000 (up from $275,000)
Income threshold defining key employees for top-heavy plans and six-month delay on payout upon separation: $230,000 (up from $220,000)
Income threshold defining highly compensated employees for nondiscrimination testing: $160,000 (up from $155,000)
Qualified Versus Nonqualified Retirement Plans
These yearly contribution limits for the well-known qualified retirement plans are a big reason why companies offer nonqualified plans: to let executives and other highly compensated employees save extra money for retirement with an elective nonqualified plan or an excess 401(k) plan. The deferred income is “nonqualified” because it does not fit the rules in the tax code that allow tax-qualified plans, such as 401(k) and 403(b) plans.
Nonqualified deferred comp allows you to put away income beyond the permissible contribution amounts of standard qualified retirement plans. For retirement planning, it can therefore bridge the considerable gap that arises between the amount of income that you will actually need in retirement and the amount of income that can be provided via your 401(k) plans and Social Security.
Nonqualified Deferrals Have Complex Rules
Nonqualified deferred compensation plans and their participants must follow the complex rules under Section 409A of the US tax code. These rules govern your deferral and distribution elections. The amounts that you defer can only be informally funded by your company, and they are at risk should the company enter bankruptcy proceedings.
The website myNQDC.com is a comprehensive resource on NQDC plans, including the basics, the deferral/distribution process, the risks, and the related financial and tax planning.
Social Security Wage Cap Also Rises In 2025
Set by the Social Security Administration, the Social Security wage cap will rise to $176,100 in 2025, up from $168,600 in 2024. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $10,453.20 in 2024 and will rise to $10,918.20 in 2025.
Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral, as shown by an FAQ at myNQDC.com that has a handy annotated diagram of Form W-2 showing where these amounts are included.
Further Resources
For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see another FAQ at myNQDC.com. See also the website’s FAQ on the top NQDC-related issues in year-end planning.