Sometime in the next few weeks, the IRS will announce the 2027 401(k) contribution limit, and the headline will almost certainly say $25,500. You can know that today, before any press release, because nobody actually picks the number. It falls out of a formula Congress wrote into the tax code, fed by three months of inflation data that wrapped up on September 30.
Milliman and Marsh both published final 2027 forecasts of $25,500, up from $24,500 this year, according to 401k Specialist on October 20. What the forecasts rarely show is how the calculation works. Once you see it, the limit stops looking like an annual policy decision and starts looking like an odometer that only clicks forward in $500 steps, and usually clicks a little late.
The 401(k) limit is pinned to one summer quarter in 2005
Everything starts in section 402(g) of the Internal Revenue Code. It sets the employee deferral limit at $15,000, then tells Treasury to adjust that $15,000 for inflation “at the same time and in the same manner as under section 415(d),” with one specific instruction: the base period is “the calendar quarter beginning July 1, 2005.”
In plain terms, every year the IRS compares average consumer prices for the most recent July through September with average prices for July through September 2005. If prices are 70% higher, the $15,000 becomes 70% higher. Section 415(d) borrows its procedure from the way Social Security benefits are adjusted, which is why both systems wait for third-quarter data and why the announcements arrive in late October or November. (If you read our piece on how the Social Security COLA is calculated, the rhythm will feel familiar, though the details differ.)
That is the whole 401(k) cost-of-living adjustment, and the detail that matters most is easy to miss. The comparison always goes back to 2005. The IRS does not take last year’s limit and add this year’s inflation. It recalculates from the original base every single time.
The 2027 401(k) contribution limit, rebuilt from three CPI readings
You can run this yourself. The Consumer Price Index for All Urban Consumers, published by the Bureau of Labor Statistics and archived on the St. Louis Fed’s FRED database, read 195.4, 196.4, and 198.8 for July, August, and September 2005. That averages to about 196.87.
For 2026, the same three months read 333.918, 334.980, and 336.940, which averages to about 335.28.
Divide the new average by the old one and you get roughly 1.7031, meaning prices are about 70.3% higher than in the base quarter. Multiply $15,000 by 1.7031 and the unrounded limit for 2027 comes to about $25,546.
Now the rounding rule. Section 402(g)(4) says any increase “which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.” The increase over $15,000 is $10,546, which rounds down to $10,500. Add it back to the base and you get $25,500: the forecast, rebuilt from three data points and one sentence of statute.
The age-50 catch-up works the same way from a $5,000 base with the same 2005 quarter and the same $500 rounding. Multiply $5,000 by 1.7031 and you get about $8,515, which rounds down to $8,500. That matches Milliman’s forecast for the catch-up contribution in 2027 exactly.
Rounding down means the limit usually trails inflation
This is where the mechanism gets interesting, because the rounding creates a hidden balance the IRS never mentions. Check 2026 the same way. The July through September 2025 CPI readings average about 323.94, which puts the unrounded 2026 limit near $24,682. Round the increase down and you land on the official $24,500. About $182 of inflation adjustment was left on the table.
It isn’t lost for good. Because each year starts over from 2005, that $182 carries into the next calculation. That’s why 2027 jumps a full $1,000 even though Milliman reports inflation of 3.7% for the 12 months ending in September 2026. A plain 3.7% raise on $24,500 would be about $906, short of two $500 steps. The leftover from last year is what pushes it over.
The same rule explains why the limit sometimes stands still. The deferral limit stayed at $16,500 for 2010 and 2011, after consumer prices fell in 2009. From 2015 through 2017 it was stuck at $18,000; when the IRS announced the 2016 figures, it said the increase in the cost-of-living index “was insufficient to trigger an adjustment.” No one in Washington decided to hold savers back. The odometer just hadn’t reached the next click.
You can even look ahead. For 2028, the unrounded limit only needs to reach $26,000, which requires the third-quarter 2027 CPI average to hit about 341.2. That’s roughly 1.8% above this year’s average. At recent inflation rates a $26,000 limit for 2028 looks likely, though a sharp slowdown in prices could still keep it at $25,500.
Each retirement limit climbs its own ladder
Not all IRS contribution limits move in $500 steps, which is why they don’t rise in lockstep. Section 415(d) rounds the overall cap on combined employee and employer additions down to the next $1,000; Milliman projects that cap rising from $72,000 to $75,000 for 2027. The defined benefit pension limit rounds down to the next $5,000, so it can go several years between jumps.
The IRA catch-up for savers 50 and older shows what happens when a limit isn’t indexed at all. It sat at a flat $1,000 for years until the SECURE 2.0 Act of 2022 added a cost-of-living adjustment. The IRS raised it to $1,100 for 2026 in its November 2025 announcement (IR-2025-111), alongside a regular IRA limit of $7,500. A year with 3.5% inflation can bump one of these numbers and leave its neighbor untouched, purely because of where each one sits on its own ladder.
What the formula means for your January paycheck
The mechanism has one practical consequence worth acting on. If you contribute a percentage of pay, a higher limit only matters if you were on track to hit the old one. But if you set a flat dollar amount per paycheck to land exactly on $24,500, your payroll system won’t raise it for you. On 26 biweekly paychecks, the extra $1,000 for 2027 works out to about $38.46 more per check, and you have to make that change yourself, usually in your plan’s portal before the first January payroll runs.
Savers aged 60 through 63 have a bigger number to plan around. Milliman projects the enhanced catch-up for that group at $11,750, for a total deferral of up to $37,250. Our explainer on how catch-up contributions work walks through who qualifies.
When the IRS release lands, it will read like news. The 2027 401(k) contribution limit is arithmetic: three months of prices, divided by three months from 2005, multiplied by $15,000, rounded down. Knowing that tells you why a year of high inflation doesn’t always buy a proportional raise in what you’re allowed to save, and why a quiet year can still produce a full $1,000 jump.
