401(k) and IRA Changes for 2025: What You Need to Know

Retirement planning is evolving, and staying informed about the latest updates to Individual Retirement Accounts (IRAs) and 401(k) plans is essential. As part of the SECURE 2.0 Act, several new rules are being phased in, beginning in 2025. These changes are designed to encourage retirement savings, increase flexibility, and adjust policies to meet the needs of today’s workforce. Here’s a breakdown of the key updates you should know.

1. Increased 401(k) Catch-Up Contributions for Ages 60 to 63

The catch-up contribution rules are getting a boost for individuals aged 60 through 63. Starting in 2025, these participants can contribute the greater of $10,000 or 150% of the standard age 50 catch-up limit (adjusted for inflation).

• In 2025, the regular catch-up contribution for 401(k) plans is $7,500, with a total annual limit of $30,500.
• As of January 2025, a participant that meets the age requirement can contribute $11,250 in catch-up contributions, with a total annual limit of $34,750. This enhancement allows people nearing retirement to accelerate their savings during this critical period.

Note: To qualify, you must turn 60 but not exceed age 63 by the end of the calendar year.

2. Increased SIMPLE IRA Catch-Up Contributions for Ages 60 to 63

In 2025, catch-up contributions for SIMPLE IRA participants aged 60 to 63 will increase to the greater of $5,000 or 150% of the standard age 50 catch-up limit.

• For 2025, the SIMPLE IRA contribution limit is $16,500, with an additional catch-up contribution of $3,500 for participants age 50 and older. Those who meet the age requirement can contribute $5,250 in catch up contributions, with a total annual limit of $21,750.
• Cost-of-living adjustments on the enhanced contributions will start in 2026.

3. Automatic 401(k) Enrollment for New Plans

Beginning in 2025, newly established 401(k) plans (formed after December 29, 2022) will automatically enroll employees unless an exception applies. This move aims to increase participation and make saving easier.

• Automatic contribution: Starts between 3% and 10% of an employee’s compensation.
• Annual increase: Contribution rate will rise by 1% each year until reaching at least 10%, but no more than 15%.
• Employees can adjust the contribution rate or opt out altogether by electing a 0% rate.

Exceptions include businesses that do not normally employ more than 10 employees, a business that has operated for less than three years, or SIMPLE 401(k) Plans, government and church plans.

4. New 10-Year Rule for Inherited IRAs

A significant change affecting beneficiaries of inherited IRAs will take effect in 2025. If you inherited an IRA from someone who passed away on or after January 1, 2020, the assets must be fully withdrawn within 10 years of the original owner’s death.

• The “stretch IRA” strategy, which allowed tax-deferred growth over several generations, is now restricted.
• However, exceptions apply for certain beneficiaries, including:
  • Surviving spouses
  • Minor children of the deceased (under 21)
  • Individuals disabled or chronically ill
  • Those within 10 years of the deceased’s age (e.g., siblings)

For non-eligible beneficiaries, annual withdrawals are now required during the first nine years, spreading out distributions to avoid a large tax burden in the 10th year.

5. Penalties for Missed Required Minimum Distributions (RMDs)

Starting in 2025, stricter penalties for missed RMDs from inherited IRAs will apply. Beneficiaries who fail to withdraw the required amount will face a 25% penalty—though this can be reduced to 10% if corrected within two years.

• Transitional relief is available for beneficiaries who missed RMDs from 2021 through 2024, but compliance becomes mandatory in 2025.

Year-End Reminders for 2024

• 401(k) Contributions: The deadline for 401(k) contributions is December 31, 2024. Participants aged 50 and older can still make catch-up contributions.
• IRA Contributions: Contributions for 2024 can be made until April 15, 2025. Exceeding the limit may result in a 6% penalty each year on the excess until withdrawn.
• RMDs: Ensure you meet the RMD requirements to avoid penalties. With the SECURE 2.0 Act, the RMD age increased to 73 in 2023 and will rise again to 75 by 2033.

Additional Savings and Withdrawal Options

• Emergency Withdrawals: The SECURE 2.0 Act introduces new exceptions for penalty-free withdrawals, including up to $1,000 for emergencies.
• Pension-Linked Emergency Savings account: Employers can now establish emergency savings accounts within 401(k) plans, allowing employees to save up to $2,500 for emergencies without tax penalties.
• Saver’s Match contributions: Beginning in 2027, eligible low- to moderate-income workers will receive up to a $1,000 government contribution to encourage retirement savings. The contribution is 50% of the participant’s annual contribution of up to $2,000 to a qualified retirement plan.

Impact of SECURE 2.0 on Retirement Planning

The SECURE 2.0 Act brings a wealth of changes designed to adapt retirement policies to today’s needs. Key takeaways include:

• Enhanced catch-up contributions for individuals aged 60 to 63
• Automatic enrollment to boost participation
• Stricter rules for inherited IRAs to ensure timely withdrawals
• Expanded emergency withdrawal options and savings incentives

Whether you’re just starting to save or nearing retirement, these changes will impact your financial strategy. Be sure to review your plan, update beneficiaries, and take advantage of the new rules to maximize your savings.

Staying informed about these updates will help you make smarter financial decisions and avoid costly penalties. Now is the time to reassess your retirement strategy to ensure you’re on track to meet your goals in 2025 and beyond.