Big Changes to Retirement Savings Are Coming in 2025

Significant changes to retirement savings rules are set to take effect in 2025, primarily affecting higher-income workers. These updates, part of the Secure Act 2.0 passed in 2022, aim to enhance retirement savings opportunities and make it easier for "max savers." With these changes taking effect next year, here's what hopeful retirees need to understand now.

Increased catch-up contributions for near-retirees

Workers approaching retirement will soon have the opportunity to accelerate their savings significantly. Starting in 2025, employees aged 60 to 63 will be able to make larger catch-up contributions to their 401(k) plans, with new limits set at either $10,000 annually or 150% of the standard catch-up contribution limit-whichever amount is greater.

This expansion of catch-up contribution limits provides a valuable opportunity for workers to boost their retirement savings during their peak earning years. More than half of 401(k) participants with income above $150,000 and nearly 40% with an account balance of more than $250,000 made catch-up contributions in 2023, according to Vanguard's 2024 How America Saves report.

New Roth requirements for high earners

However, there are important changes to how exactly these 401(k) catch-up contributions can be made, particularly for higher-income employees. Also starting in 2025, workers earning more than $145,000 (adjusted annually for inflation) from a single employer in the previous year will no longer be able to make pre-tax catch-up contributions. These high earners must instead direct their catch-up contributions to Roth accounts. Here's how to know if it's the right time for you to make a Roth IRA conversion.

Note: This requirement applies to catch-up contributions in 401(k), 403(b), and 457(b) plans.

What this means for your taxes

With Trump-era tax cuts set to expire next year, the shift to mandatory Roth catch-up contributions for high earners represents a significant change in tax treatment. Contributions will be made with after-tax dollars, and no immediate tax deduction will be available. However, qualified withdrawals in retirement will be tax-free.

The bottom line: planning ahead

With these changes approaching, workers should consider reviewing their current retirement savings strategy. If you're a high earner approaching retirement, evaluate your eligibility for increased catch-up contributions, as well as the tax implications of mandatory Roth contributions.

As always, consult with a financial advisor to understand the long-term implications and explore alternative options. Remember, the most effective retirement strategy is to contribute consistently and let your investments grow undisturbed over time.