As you’re planning the best way to maximize your retirement savings next year, it’s important to know what changes have been made to retirement accounts beginning January 1. Most of these are the result of the SECURE Act 2.0 passed in 2022. Provisions of the Act have been phased in and these are the changes for 2025.
Automatic 401(k) enrollment
In an effort to increase individual retirement savings, SECURE 2.0 required new 401(k) plans established on or after December 29, 2022, to implement an automatic enrollment feature unless an exception applies.
The initial automatic enrollment contribution amount must be at least 3% but not more than 10%. Each year thereafter, that amount increases by 1 percent until it reaches at least 10%, but not more than 15%.
Automatic enrollment does not mean mandatory participation. Employees can change the rate or can opt out by electing a zero percent (0%) contribution rate.
Catch-up contributions
In 2001, Congress passed a bill establishing catch-up contributions. It allowed people 50 years old and older to contribute more than just the regular annual contribution limit. In 2025, there will be an even higher catch-up amount for people between 60-63 who are active participants in a 401(k) or 403(b) plan.
Effective for the 2025 tax year, active participants aged 60 through 63 can contribute the greater of $10,000 or 150% of the 2024 catch-up contribution limit that is indexed for inflation. In 2025, the total limit for 401(k) contributions for those aged 60 to 63 is $10,000.
There is a similar catch-up provision for workers aged 60-63 who participate in SIMPLE IRA plans. The new catch-up contribution limit will increase to the greater of $5,000 or 150% of the regular age 50 catch-up contribution limit. Cost of living adjustments will begin in 2026.
New 10-year rule for inherited IRAs
In general, for most beneficiaries, the new rules are fairly simple. If you inherited an IRA from someone who died on or after January 1, 2020, you are required to withdraw all funds in the IRA no later than December 31 of the tenth full calendar year following the death of the individual from whom you inherited the IRA. You may be required to take distributions years 1-9 if the original IRA owner was taking required distributions at the time of their death.
There are exceptions for inherited IRAs for a limited number of beneficiaries:
- 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 one of the four types of beneficiaries described above, you must still withdraw funds from the inherited IRA over your lifetime beginning in the year following the decedent’s death. However, a surviving spouse can transfer the inherited funds into their own IRA and are not required to take required distributions until they reach their “required beginning date” (RBD).
Inherited IRA RMD penalties
Starting in 2025, a 25% penalty will be assessed for those who do not take required minimum distributions from their inherited IRAs. However, the penalty can be lowered to 10% if the required distribution is corrected within two years.
Year-end reminders
- 401(k) Contribution limits and deadlines. For most 401(k) plans, the deadline to contribute is December 31st. This deadline also applies to participants who are 50 or older at the end of the calendar year and want to make a catch-up contribution.
- IRA Contribution limits and deadlines. You have until April 15 of next year to make contributions to your Roth or Traditional IRA for this year.
- Excess contributions. If you exceed the IRA contribution limit, you can withdraw excess contributions from your account by the due date of your tax return (including extensions). If you don’t, you’ll be assessed a 6% tax each year the excess amount is left in your account.
- Required minimum distributions (RMD). Remember that there is an excise tax on any RMD you fail to take on time. You must calculate the RMD separately for each Traditional IRA you own, but you can withdraw the total amount from one or more of your non-Roth IRAs.
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
