The upcoming 2025 year brings several changes to Individual Retirement Accounts (IRAs) and 401(k) plans. These modifications can help you save more for retirement, but staying informed is crucial.
You should review your retirement accounts annually to stay informed of any new rules or regulations. This includes tracking changes to contribution limits, withdrawal requirements, and other relevant factors.
The SECURE 2.0 Act introduced several significant changes to retirement plans that are being implemented gradually. Understanding these modifications can help you optimize your retirement savings and avoid penalties.
Here are some changes coming to IRAs in 2025.
1 Automatic Enrollment: A New Requirement for 401(k) Plans
The SECURE 2.0 Act mandates that new 401(k) plans established after December 29, 2022, implement an automatic enrollment feature starting in 2025 unless specific exceptions apply. This measure aims to encourage greater participation in retirement savings.
Under automatic enrollment, employees are automatically enrolled in the company’s 401(k) plan with an initial contribution rate between 3% and 10% of their salary. This contribution rate gradually increases by 1% each year until it reaches at least 10% but does not exceed 15%.
2 Enhanced Catch-Up Contributions for Older SIMPLE IRA Savers
The SECURE 2.0 Act significantly enhances catch-up contributions for older retirement savers. This provision allows individuals aged 60 to 63 to contribute substantially more to their 401(k) plans.
Previously, catch-up contributions for those aged 50 and older were subject to a fixed annual limit. However, the new law allows eligible participants to contribute over $10,000 or 150% of the standard catch-up contribution limit, indexed for inflation.
This means that older savers can contribute significantly more to their retirement accounts, providing a valuable opportunity to boost their savings and secure a more comfortable retirement.
Key Points to Remember:
- Eligibility: This enhanced catch-up contribution is available to active participants aged 60 to 63 by the end of the calendar year.
- Increased Contribution Limit: The maximum contribution amount is the greater of $10,000 or 150% of the standard catch-up contribution limit.
- Opportunity for Accelerated Savings: This provision offers older savers a unique opportunity to increase their retirement savings significantly.
By taking advantage of this enhanced catch-up contribution, older individuals can work towards a more financially secure retirement.
3 New 10-Year Rule for Inherited IRAs: Key Points
A significant change to inherited IRAs took effect in 2020, introducing a 10-year rule for most beneficiaries. Under this rule, inherited IRAs must be fully withdrawn by December 31 of the tenth full calendar year following the decedent’s death.
This new rule eliminates the “stretch IRA” strategy, which previously allowed beneficiaries to spread withdrawals over their lifetime, taking advantage of tax-deferred growth.
However, there are exceptions for particular beneficiaries who can still utilize the stretch IRA:
- Surviving spouses
- Children under the age of 21
- Beneficiaries not more than 10 years younger than the decedent
- Individuals with disabilities or chronic illnesses
For these eligible beneficiaries, withdrawals from the inherited IRA must be taken over their lifetime, starting the year after the decedent’s death. Surviving spouses can transfer the inherited funds to their IRAs and delay withdrawals until their required beginning date.
4 Maximizing Retirement Savings: Enhanced 401(k) Catch-Up Contributions for Ages 60-63
Introduced in 2001 by President George W. Bush to allow employees 50+ to make additional deposits into tax-advantaged retirement accounts. Amounts adjusted for inflation, though not necessarily annually.
Current Catch-Up Contribution Limits (2024):
- Standard 401(k) contribution limit: $23,000 (up from $22,500 in 2023)
- Catch-up contribution limit: $7,500 (unchanged from 2023)
- Total contribution limit: $30,500
New Super-Sized Catch-Up Provision (Effective 2025):
- Eligibility: Active participants aged 60-63
- Amount: Greater of $10,000 or 150% of the inflation-adjusted 2024 catch-up limit
- Total 401(k) contribution limit for ages 60-63 in 2025: Standard limit + $10,000
Key Points:
- This enhanced catch-up is in addition to the standard contribution limit
- Eligibility is determined by age at the end of the calendar year
- Provides a significant boost to retirement savings in the years approaching retirement
This new provision offers a valuable opportunity for those nearing retirement to increase their savings in a tax-advantaged manner substantially.
5 Inherited IRA RMD Penalties Are Enacted
The IRS has delayed the implementation of the final rules governing required minimum distributions (RMDs) from inherited IRAs until 2025. However, starting in 2025, beneficiaries who fail to take their RMDs will be assessed a 25% penalty.
To understand which IRA accounts were exempt from penalties and how to potentially reduce the penalty to 10%, please refer to the following resources: IRS Delays IRA RMD Rules Again to understand which IRA accounts were exempt from the penalties and New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More to understand how to lower the penalty from 25% to 10%.
