Saving for retirement has become an important part of the experience of workers across the country, so it is not unexpected that the Internal Revenue Service (IRS) makes annual modifications to the way these retirement plans work in order to improve how workers save money.
These modifications are intended to keep up with inflation and cost-of-living adjustments, and they mostly consist of raising the maximum contribution limits for various types of retirement plans.
However, just because that is the most prevalent change does not mean it is the only change, as seen by a new mechanism to deal with inherited plans this year.
So, without further ado, here are four changes that the IRS will impose in 2025 that everyone planning their retirement with a 401(k) or individual retirement account (IRA) should be aware of.
IRS allows “Super-Sized” Catch-Contributions
Catch-up contributions allow those over 50 to exceed the usual contribution limit for tax-advantaged retirement savings accounts such as 401(k)s. In 2025, this limit will be increased.
However, some older workers will be able to give even more, as a new IRS rule allows donors aged 60 to 63 to “contribute up to $11,250 next year — an additional $3,750 in catch-up contributions,” according to The New York Times.
This adjustment permits people in that age range to contribute up to $34,750 to their employer retirement plans by 2025. This provision was established because many older people are retiring with virtually no savings and will rely nearly entirely on Social Security for their retirement.
The IRS hopes to help people save more by offering them more opportunities to contribute near the end of their careers, when their earnings are higher and their duties are less financially burdensome.
Part-Timers Can Access 401(k) Plans Earlier
Contrary to popular assumption, not everyone is eligible for employer-sponsored retirement plans. Part-time employees will be eligible for their company’s 401(k) plan in 2024 if they complete 1,000 hours per year or 5,000 hours over three consecutive years, but the three-year minimum will be reduced to two years beginning in 2025.
This move implies that part-time employees who were waiting to achieve the prior level will now be eligible a year earlier, and more workers will be able to contribute to their retirement funds.
401(k) Enrollment Will Be Automatic in 2025
Because not every employee has the automatic entitlement to an employer-sponsored retirement plan, many fail to sign up when the choice becomes available. This is unfortunate for them since they are missing out on several opportunities to save and take advantage of benefits such as employer-matched contributions.
However, beginning in 2025, any 401(k) plan established after December 29, 2022 will automatically enroll employees who are qualified and do not want to opt out.
This ensures that no employee forgets to sign up, with a minimum commitment of 3% but less than 10%, and that if they do not protest, the contribution will increase by 1% per year until 15% is attained. This will assist in saving efforts.
Inherited IRA Penalties Will Take Effect After 10 Years.
Previously, heirs of inherited IRAs were granted transitional assistance if they did not take required minimum distributions (RMDs). However, the IRS currently enforces the “10-year rule,” which states that the whole inherited IRA must be emptied by the tenth year following the death of the original account owner.
Failure to comply carries a 25% penalty. If you inherited an IRA after 2020, make sure the whole value is withdrawn or transferred within the 10-year timeframe to avoid penalties.
Also See:- Say goodbye to paying IRS taxes in 2025: the list of Americans who will be exempt starting next year