Due to the SECURE Act 2.0, several updates to Individual Retirement Accounts (IRAs) and 401(k) plans are scheduled for 2025. These changes will be rolling out over the next few years. Understanding these modifications can help you save money, avoid penalties, and plan for your financial future. Read on as we review these changes coming to IRAs and 401(k)s in 2025.

Changes to Catch-Up Contributions

In 2025, the contribution limit for 401(k) accounts will be $23,500, an increase from $23,000 in 2024. Meanwhile, individuals aged 50 and above can continue contributing up to $7,500 to their IRA accounts.

A notable change starting in 2025 will benefit workers aged 60 to 63. Thanks to provisions in the SECURE 2.0 Act, these individuals will be eligible for increased catch-up contributions of up to $11,250. This provision empowers older workers to save more and strengthen their financial security as they approach retirement.

Automatic Enrollment in 401(k) Plans

Starting in 2025, newly established 401(k) plans from December 29, 2022, will be mandated to include an automatic enrollment feature. This means that eligible employees will be automatically enrolled in their employer-sponsored retirement plan with an initial contribution rate set at a minimum of 3%. Employees can opt out by electing a 0% contribution if they prefer not to participate. Employers have the flexibility to incrementally increase the contribution percentage by 1% annually, increasing it to a maximum of 10%. This automatic enrollment strategy is designed to encourage higher participation rates in retirement savings plans, which will help employees establish a more stable financial future.

Catch-Up Contributions for SIMPLE IRAs

Significant adjustments are being introduced for SIMPLE IRAs (Savings Incentive Match Plan for Employees). In 2025, the annual contribution limit for these accounts will rise from $16,000 in 2024 to $16,500. Individuals aged 50 and above will continue to have a catch-up contribution limit of $3,500. However, a new provision allows those aged 60 to 63 to contribute up to $5,250. This change offers added flexibility and opportunities for growth as these individuals near retirement.

A New 10-Year Rule for Inherited IRAs

The SECURE 2.0 Act introduced significant changes to inherited IRAs, requiring most non-spouse beneficiaries to withdraw the entire account balance within 10 years of the original owner’s death. Previously, beneficiaries could adhere to the “stretch IRA” rules, allowing them to take required minimum distributions (RMDs) over their lifetime. The updated guidelines are designed to accelerate the use of inherited funds. Moving forward, the new guidelines will affect how benefactors should structure their estate plans to minimize tax burdens on heirs.

However, there are exceptions to the 10-year rule. These benefactors will still qualify for the stretch IRA rule of lifetime distribution:

• Surviving spouses
• Children of the account holder under age 21
• Individuals no more than 10 years younger than the deceased
• Beneficiaries with disabilities or chronic illnesses

If you fall into one of these categories, you can take distributions over your lifetime, starting the year after the original account holder’s death.

Penalty Updates for Inherited IRA RMDs

Finally, changes to the penalties for missed Required Minimum Distributions (RMDs) from inherited IRAs are on the horizon. Historically, beneficiaries who failed to take the required distributions were subjected to a 50% penalty on the amount not withdrawn. Beginning in 2025, this penalty will drop to 25%. This change offers a cushion for errors to individuals who inadvertently miss their RMD deadline, but they must prioritize staying compliant with RMD schedules to avoid unnecessary costs.