We are already a month into 2025. As the holiday season is put in the rearview mirror, let’s take a closer look at some changes to retirement accounts for 2025 and how they may impact you and your savings goals.
Additional Catch-Up Contributions Between Ages 60-63
Generally, those who have reached age 50 or older are entitled to make a “catch-up” contribution to workplace retirement plans each year. This is a nice feature for employees who may have already maximized their workplace retirement plan contributions and are wanting to save more. The current catch-up contribution amount for those 50 or older is $7,500. However, starting in 2025, employees who will reach age 60 by the end of the year will be able to increase their catch-up contribution from $7,500 to $11,250 for the current calendar year. This higher catch-up contribution amount is allowed for employees between the ages of 60-63 (employees reaching age 64 in the current year would still be eligible for a catch-up contribution, but at the lower amount which is currently $7,500). Please note that this rule applies to employer sponsored defined contribution plans (i.e. 401k plans). If your employer offers a SIMPLE IRA plan, the contribution limits will be lower than the figures noted above, but they too are offering a higher catch-up amount for employees aged 60-63.
Auto Enrollments in Workplace Retirement Plans
While there are a few exceptions, most businesses that are adopting a workplace retirement plan like a 401k will be required to automatically enroll eligible new employees at a contribution rate between 3%-10% of their compensation. They will also be required to increase the contribution rate by 1% per year thereafter until the contribution rate reaches 10% but not more than 15%. Employees are not required to participate if they don’t want to, however, they will have to proactively opt-out now.
10 Year Rule for Inherited IRAs
When the Secure Act 1.0 legislation originally passed in 2019, it changed the rules regarding distribution options for certain beneficiaries of retirement accounts (both IRAs and workplace retirement plans). For beneficiaries who inherit retirement accounts after January 1, 2020 and who do not meet the criteria of an “Eligible Designated Beneficiary,” generally have a 10 year time horizon with which the funds from the inherited account must be fully withdrawn. The IRS has now issued additional guidance (finalized in 2024), which further states that certain beneficiaries who fall under the 10-year rule, may also be required to take a required minimum distribution (“RMD”) in years 1-9. The rules around options beneficiaries have when they inherit a retirement account are complicated and it’s best to seek advice from a qualified financial or tax professional who can work with you on an individualized basis.
Inherited IRA RMD Penalties
As mentioned in the previous paragraph, certain beneficiaries of retirement accounts may now need to take a required minimum distribution or “RMD” from these inherited accounts in years 1-9 if they are subject to the 10-year rule. Due to confusion surrounding whether or not RMDs were required, the IRS previously said it would not enforce any penalties for those who inherited a retirement account after January 1, 2020 and didn’t take an RMD in 2021, 2022, 2023, or 2024. Now that the rules have been finalized, 2025 is the first year where the IRS will start assessing a penalty for beneficiaries who are required to take an RMD from their inherited account(s) and do not do so by year-end. Again, it’s best to seek advice from a qualified financial or tax professional if you inherit a retirement account because the rules are complex and mistakes can be costly or potentially irreversible.
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.