Take a close look at your retirement plans—2025 is set to be a big year for changes! The SECURE 2.0 Act introduced several updates to traditional and Roth IRAs and 401(k) plans, with many being phased in over the next few years, including some in 2025.
Let’s start with enhanced catch-up contributions for workers aged 60 to 63. For more than 20 years, employees aged 50 and older have been allowed to make catch-up contributions to their 401(k) plans to help compensate for earlier years of lower savings. In 2025, plan participants aged 60 to 63 will be able to contribute the greater of $10,000 or 150% of the 2024 catch-up contribution limit, indexed for inflation. Remember, the SECURE 2.0 Act passed in 2022, and the IRS didn’t set the 2024 catch-up limits until November 2023, meaning in 2025, workers aged 60-63 can contribute an additional $11,250 to their 401(k) plans, bringing their total contribution to at least $34,250. The IRS will officially announce the 2025 limits within the next month. This amount also excludes any employer matching contributions, so there’s significant potential to save even more.
For younger employees, SECURE 2.0 generally requires new 401(k) plans established after Dec. 29, 2022, to automatically enroll employees at 3% of their salary, unless they opt out. Additionally, the default contribution rate must increase by 1% each year until it reaches a minimum of 10% but no more than 15% of compensation. Automatic enrollment has been shown to increase participation in plans by 50% and can triple participation rates among new hires.
SECURE 2.0 also benefits employees who change jobs frequently early in their careers. One of the 2025 provisions allows plan providers to offer automatic portability, enabling employees to roll over their retirement accounts to their new employer’s plan. Currently, plans are permitted to cash out balances of $1,000 or less when an employee leaves the plan. Unfortunately for the employee, this is a taxable event and effectively restarts their retirement savings. For those with balances of $7,000 or less, their former retirement plan can roll the assets into a Safe Harbor IRA. Automatic portability will transfer these savings from the Safe Harbor IRA to their new employer’s plan, simplifying retirement savings management and helping employees avoid cashing out early.
Finally, a warning: penalties related to inherited IRA required minimum distributions (RMDs) will take effect. The SECURE Act eliminated the “Stretch IRA,” requiring non-spouse beneficiaries to fully deplete the account by December 31 of the tenth year following the death of the original IRA holder. However, it was initially unclear whether beneficiaries were required to take RMDs during years 1–9, and the IRS has provided temporary relief for beneficiaries who failed to take RMDs from their inherited IRAs between 2021 and 2024. In 2025, a 25% penalty will be assessed on any undistributed amounts if beneficiaries fail to meet their RMD requirement. However, this penalty can be reduced or waived entirely if corrected in a timely manner.
If you have questions on the retirement plan changes coming in 2025, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the October 12, 2024 “Henssler Money Talks” episode.