The retirement-savings landscape will look quite different in 2025, thanks to the passage of the SECURE Act 2.0. Americans will see an improved prospect of retirement savings under the changes. Here are five big changes affecting Individual Retirement Accounts (IRAs) and 401(k) plans.
1. Delayed Required Minimum Distributions (RMDs)
The most significant change, of course, is that by which one must begin taking RMDs from their traditional IRAs and 401(k)s. Beginning in 2025, the RMD age will increase to 73 years, giving people more time to grow their retirement savings tax-deferred. That’ll come in handy for people looking to maximize their investment before they have to make mandatory withdrawals. By 2033, this age will increase to 75, granting retirees even greater flexibility.
2. 401(k) contribution limit increases
The contribution limit for 401(k) plans in 2025 will be $23,500, increased from $23,000 in 2024. This adjustment allows workers younger than 50 years to contribute even more to their retirement accounts. In addition, employees aged 50 and above can make catch-up contributions, which stay at $7,500. But for those aged 60 to 63 years old, it includes a new provision allowing them to make a contribution of up to $11,250 as a catch-up contribution bringing the total contribution limit to $34,75024 significantly.
3. Automatic enrollment in 401(k) plans
Most newly established 401(k) plans after December 29, 2022, will be required to automatically enroll all eligible employees starting in 2025. This implies that employees will be automatically enrolled in their employer’s retirement plan unless they opt out. The default contribution rate will be set between 3% and 10% with annual increases of 1% until it reaches at least 10% but not more than 15%. This change seeks to make the enrollment process easy and hence foster high participation rates in the retirement savings plans.
4. Expanded access for part-time workers
Another important change is in the eligibility requirements for part-time employees to take part in 401(k) plans. Starting in 2025, part-time employees will be eligible for their employer’s 401(k) plan after working at least 500 hours in a year for two consecutive years. That is down from three years of service with at least 1,000 hours worked each year. This change will make more workers eligible for tax-deferred retirement savings.
5. Inherited IRA Rules clarified
Changes also apply to inherited IRAs starting in 2025. The IRS has reaffirmed that non-spouse beneficiaries would follow what’s often called the “10-year rule,” meaning inherited accounts would have to be fully withdrawn within ten years of the date of the original account holder’s death. To understand the 10 year rule, read this article, The IRS’s 10-year rule change will have an impact on millions of American retirees. Previously, beneficiaries could stretch out distributions over their lifetimes; however, failing to comply with the new rules could result in a 25% penalty on any amounts not distributed. This change makes it even more important to understand RMDs and plan for them. There are also exceptions to the 10 year rule and readers might want to read, Exceptions to the IRS’s new annual RMD Rule for inheriting retirement account, to know more.
The upcoming changes to IRAs and 401(k)s in 2025 reflect an ongoing effort by lawmakers to enhance retirement security for Americans.
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