Essential changes to Individual Retirement Accounts (IRAs) and 401(k) plans are set to take effect in 2025, primarily due to the SECURE 2.0 Act. These modifications, set to phase in over the next several years, will impact your retirement savings strategy. Here’s what you need to know about these upcoming changes.
Catch-Up Contributions
One of the most significant changes involves catch-up contributions. The 401(k) contribution limit will increase from $23,000 in 2024 to $23,500 in 2025, while IRA contributions for workers age 50 and older remain at $7,500.
However, starting in 2025, workers aged 60 through 63 will have access to even greater catch-up contributions due to a provision in the Secure 2.0 Act. They’ll be able to make catch-up contributions of up to $11,250. This move helps workers in this age group bolster their financial security as they near retirement.
Automatic 401(k) Enrollment
Another key reform of the Secure 2.0 Act seeks to increase individual retirement savings. New 401(k) plans established on or after December 29, 2022, will be required to implement an automatic enrollment feature in 2025. Eligible employees will be automatically enrolled in their employer’s retirement plan at a minimum contribution rate of 3%, though they can opt out by selecting a 0% contribution rate. Employers can gradually increase the contribution amount by 1 percent, reaching up to 10% over time.
SIMPLE IRA Catch-Up Contributions
Changes are on the way for SIMPLE IRAs (Savings Incentive Match Plan for Employees). The annual limit for contributions to SIMPLE IRAs will increase to $16,500, up from $16,000 in 2024. For those aged 50 or older, the contribution limit remains at $3,500, but it increases to $5,250 for those aged 60-63, allowing for greater flexibility and potential for growth as these workers approach retirement.
The New 10-Year Rule for Inherited IRAs
Under the SECURE 2.0 Act, non-spouse beneficiaries must withdraw the entire balance of an inherited IRA within 10 years of the original account holder’s death. This is a shift from the previous “stretch IRA” rules, which allowed beneficiaries to take distributions over their lifetime. The change aims to ensure that inherited funds are utilized more quickly and will impact the tax strategies used in the future when benefactors are planning for their heirs.
However, the following types of beneficiaries of inherited IRAs can still utilize the “stretch IRA”:
- Surviving spouses
- A child of the decedent under the age of 21
- A beneficiary who is not more than 10 years younger than the decedent
- An individual who is disabled or chronically ill
If you are the benefactor of an inherited IRA and fall into one of the categories above, you must still withdraw funds from the inherited IRA over your lifetime beginning in the year following the decedent’s death.
Inherited IRA RMD Penalties
Lastly, there will be updated penalties related to Required Minimum Distributions (RMDs) for inherited IRAs. Previously, failing to follow the RMD rules resulted in a penalty of 50% on the amount not withdrawn. Starting in 2025, this penalty is significantly reduced to 25%. This adjustment offers some relief for beneficiaries who miss RMD deadlines, making the inherited IRA process less financially burdensome.
