The Internal Revenue Service (IRS) has revealed major modifications to Individual Retirement Accounts (IRAs) and 401(k) plans scheduled for 2025. These revisions are designed to assist workers in enhancing their retirement savings by modifying contribution limits and catch-up options. Starting in 2025, individuals between the ages of 60 and 63 will be permitted to make “super” catch-up contributions totaling up to $11,250 to their employer-sponsored retirement plans.
This represents an increase of $3,750 over the existing catch-up limit for those aged 50 and above. With this modification, qualified employees could potentially contribute as much as $34,750 each year to their 401(k) or comparable accounts. Additionally, the new regulations will also be advantageous for part-time workers.
The duration that part-time employees need to work consecutively to qualify for their employer’s 401(k) plan will be cut from three years to two years. This adjustment facilitates earlier retirement savings for part-time staff. Another key update involves the automatic enrollment requirement for new 401(k) plans initiated after December 29, 2022.
Commencing in 2025, these plans will be obligated to automatically enroll eligible workers at a baseline contribution rate of 3%, which may increase by 1% annually, capping at 15%. Employees retain the option to opt-out if they choose.
Updates to retirement plans for 2025
The IRS is also implementing the “10-year rule” concerning inherited IRAs. Beneficiaries who receive an IRA must deplete the account within a decade following the death of the original account holder; failing to do so will incur a 25% penalty on the remaining funds. This regulation affects IRAs that have been inherited since 2020.
While the super catch-up contribution offers a valuable opportunity for older individuals to enhance their retirement savings, many may find it financially challenging. The Economic Policy Institute reports that the average household led by individuals aged 55 to 64 possesses only $10,000 in retirement savings. High-income earners are more likely to take advantage of the improved catch-up provision, as they have a greater probability of maximizing these contributions compared to the average population.
While employers are not obligated to provide the super catch-up option, most large plan providers expect that it will be adopted widely. Beyond the adjustments for IRAs and 401(k)s, the IRS has also updated contribution ceilings for various tax-advantaged accounts based on inflation rates. Contribution limits for Health Savings Accounts (HSAs) will rise to $4,300 for individuals and $8,550 for family plans in 2025.
In addition, the contribution limits for Flexible Spending Accounts (FSAs) will increase to $3,300. These IRS modifications for 2025 underscore multiple changes that will impact the tax-advantaged savings and retirement accounts of many Americans. Proactive planning and adapting contributions accordingly can aid individuals in maximizing these new limits to ensure a financially secure future.
