Will You Derive Advantage from the Significant 401(k) Revisions Scheduled for 2025?
Will You Derive Advantage from the Significant 401(k) Revisions Scheduled for 2025?
It's no mystery why 401(k)s are widely favored retirement plans: They come with substantial yearly contribution limits and the potential for employer contributions. Certain companies even allow you to decide if you want to deposit pre-tax or post-tax funds into your account.
These accounts are expected to look even more appealing by 2025, with four significant transformations taking effect on January 1st. While not all of these changes may impact you immediately, it's wise to stay informed as they could influence you in future years.
1. Amplified contribution limits
The most substantial 401(k) update in 2025 is a $500 increase in contribution limits. As of now, individuals under 50 can contribute up to $23,000 annually, while those 50 and above can contribute up to $30,500. In 2025, these limits will escalate to $23,500 and $31,000, respectively.
Remember, this is simply the maximum amount you can contribute personally to your account. If you max out your contributions and receive employer matching contributions, you can surpass these limits. The total annual maximum for all 401(k) contributions in 2024 is $69,000, while it rises to $70,000 in 2025. This collective limit applies to all your 401(k)s, not individually.
2. Superior catch-up contributions for workers aged 60 to 63
Individuals aged 50 and above are already entitled to higher contribution limits due to their ability to make a $7,500 catch-up contribution. Starting in 2025, the government introduces a new catch-up contribution tier for those between the ages of 60 and 63 by December 31, 2025.
These individuals will receive a catch-up contribution of $11,250, resulting in a total 2025 contribution limit of $34,750. Currently, only those aged 60 to 63 are eligible for this, while workers aged 50 to 59 and those 64 and above are limited to a maximized $31,000 contribution in the following year.
3. Compulsory 401(k) auto-enrollment for eligible employees
Beginning in 2025, the federal government will force employers to automatically enroll eligible employees in 401(k) plans in an effort to increase participation. The new rule specifies a minimum initial auto-enrollment percentage of at least 3% but not more than 10% of income. It also mandates a yearly 1% increase until you reach at least 10%, but not exceeding 15% of income. Employees retain the option to opt out or choose their contribution percentage at any time.
This change won't be mandatory for all plans in 2025, however. Exempted from this law include:
- Existing 401(k) plans (grandfathered)
- Small businesses with 10 or fewer employees
- New businesses that have been in operation for less than three years
- Church plans
- Governmental plans
This change may not impact you in 2025. However, it could potentially apply to you in future years.
4. Simplified 401(k) access for part-time workers
Under the current rules, part-time workers can be eligible to join their employer's 401(k) plan if they have worked for the employer for at least 500 hours in each of the last three years. However, a 2025 law change will reduce this requirement to just two years of service with 500 hours in each year.
This minor modification could assist some part-time employees in gaining access to their employer's 401(k) plan sooner. However, they'll still need to find the necessary funds to participate, and this isn't always easy.
- With the increased contribution limits in 2025, individuals planning for retirement will have an opportunity to save more money in their 401(k) accounts, potentially accelerating their retirement finance goals.
- For those nearing retirement age, the new catch-up contribution tier introduced in 2025 for workers aged 60 to 63 will provide an additional financial boost, allowing them to save even more money for their golden years.