Are You Ready for These 8 Big Changes to Retirement Savings in 2025?
As we approach 2025, major shifts in retirement planning are coming, thanks to the SECURE 2.0 Act. Whether you're saving for retirement or an employer managing a retirement plan, it's important to stay on top of these changes to maximize your savings and meet new requirements.
Here are eight key retirement savings changes to expect in 2025.
1. Automatic 401(k) Enrollment Expands
Starting in 2025, most companies with more than ten employees will be required to automatically enroll eligible workers into their 401(k) retirement plans. This change, mandated by Section 101 of the SECURE 2.0 Act, ensures that more employees are actively saving for their future. The automatic enrollment will begin with a minimum contribution rate of 3% of the employee's salary, though this amount can be increased over time by the employer.
This rule removes a significant barrier to retirement saving: inertia. Many employees, especially younger workers, often delay enrolling in their retirement plan due to lack of knowledge, competing financial priorities, or simply procrastination. Automatic enrollment eliminates the need for workers to actively sign up, allowing them to begin building their retirement savings without additional effort. Once enrolled, employees always have the option to adjust their contribution rate or opt out, but the default setting nudges them towards saving.
For employers, offering automatic enrollment is not just about compliance with the new law—it’s a powerful tool to help employees secure their financial future. Companies that have implemented auto-enrollment in the past have seen remarkable increases in participation rates. According to the IRS, businesses with automatic 401(k) enrollment have seen participation rates rise from 70% to over 90%. This not only benefits employees but also enhances a company’s benefits package, making it more attractive to new hires.
Additionally, automatic enrollment helps close the retirement savings gap, especially for lower-income and younger employees who may not otherwise prioritize long-term savings. By ensuring that a portion of their paycheck is regularly set aside for retirement, workers are better positioned to meet their long-term financial goals.
Employers can also benefit from SECURE 2.0's tax credits for implementing automatic enrollment. For small businesses, there is a $500 annual credit for three years if they start a new retirement plan with automatic enrollment, making it more affordable to offer these plans. This can help reduce administrative costs and make retirement savings plans more accessible to both employers and employees.
As automatic enrollment becomes the norm, workers are more likely to achieve greater retirement security, making this provision one of the most impactful changes in the SECURE 2.0 Act. Whether you’re an employer or an employee, this shift is a crucial step toward more comprehensive retirement planning.
2. Easier Access to Emergency Funds
The SECURE 2.0 Act also makes it easier for employees to withdraw funds from their retirement accounts during emergencies. Under Section 127, workers can link their retirement plans to an emergency savings account. This allows annual contributions of up to $2,500 and provides the ability to make four penalty-free withdrawals per year.
This is especially beneficial for those facing unexpected financial crises, allowing for more flexibility without jeopardizing long-term savings.
3. Bigger Catch-Up Contributions for Older Workers
If you’re aged 50 or older, you already have the ability to make catch-up contributions to your retirement account, allowing you to contribute more than the standard annual limit. This provision is especially helpful for workers who may not have been able to save enough earlier in their careers due to financial obligations such as paying off debt, supporting children’s education, or other life events. Currently, those aged 50 and above can contribute an additional $7,500 annually to their retirement accounts, on top of the regular contribution limits. However, starting in 2025, the SECURE 2.0 Act introduces an even more generous provision: individuals aged 60 to 63 will be able to contribute up to $10,000 in catch-up contributions annually. This $10,000 limit will also be indexed for inflation, ensuring that the catch-up contribution keeps pace with rising costs over time.
This change is a significant boost for older workers who may be approaching retirement but have not saved as much as they would like. For many, the 60-to-63 age range is a crucial window to shore up their retirement savings, especially if they plan to retire within the next five to ten years. The higher catch-up contribution limit offers a valuable opportunity to significantly grow retirement accounts in a short period of time, helping to close any savings gaps. Whether you’ve been playing catch-up on retirement savings or simply want to maximize your financial security, taking advantage of this increased limit can have a lasting impact on your retirement readiness.
4. Employer Matching Contributions to Roth Accounts
One major change under Section 604 of the SECURE 2.0 Act is that employers will be able to match contributions to Roth accounts. Previously, matching contributions were typically made to pre-tax accounts, like traditional 401(k)s. This change means that employees can enjoy tax-free growth on employer-matched contributions in their Roth 401(k) accounts.
For those who prefer the tax benefits of Roth accounts, this change is a game-changer.
5. Repurpose Unused 529 College Savings for Retirement
For many families, a 529 college savings plan has been a go-to option for setting aside money for their children’s education. However, life doesn’t always go as planned, and sometimes the funds in a 529 plan go unused—whether due to scholarships, lower-than-expected education costs, or a change in the beneficiary's career path. In the past, withdrawing these funds for non-educational expenses could result in penalties, leaving families with few options. The SECURE 2.0 Act introduces a game-changing provision: starting in 2024, unused funds from a 529 plan can be rolled over into a Roth IRA for the beneficiary, subject to certain conditions. This allows families to avoid penalties and make better use of any leftover educational savings by converting them into retirement funds.
One important condition is that the 529 plan must have been open for at least 15 years before any rollover to a Roth IRA can take place. Additionally, the rollover is subject to annual Roth contribution limits, with a lifetime cap of $35,000 that can be transferred. This new flexibility provides families with a smart way to repurpose their 529 savings for long-term retirement benefits. For those who have diligently saved but no longer need the funds for education, this provision ensures that the money can still grow tax-free and be used to support a financially secure retirement, making it an excellent financial planning tool.
6. New Tax Credit for Low-Income Savers
Starting in 2027, low-income earners will benefit from a government match to their retirement contributions, replacing the current tax credit system. This new saver’s credit aims to help low-income workers build their retirement savings by providing a government match instead of an immediate tax break.
This will encourage consistent saving among low-income workers, helping them secure more robust retirement accounts.
7. Automatic Portability of 401(k) Plans
One of the most exciting provisions in the SECURE 2.0 Act is the introduction of automatic portability for 401(k) plans. Changing jobs is common, but it often comes with the risk of losing track of retirement savings. Many employees with small 401(k) balances either cash out their accounts, incurring taxes and penalties, or fail to roll over their funds into a new plan, leading to what’s known as 401(k) leakage. This leakage can significantly reduce long-term retirement savings, particularly for employees who change jobs frequently. Automatic portability aims to address this issue by automatically transferring small-balance 401(k) accounts to a new employer's plan when an employee switches jobs, without the need for manual intervention.
By automating the process, employees are less likely to lose track of their retirement savings or be tempted to cash out early. This feature keeps retirement accounts growing over time and ensures that workers retain the full value of their retirement funds throughout their careers. It’s a win-win for both employees and employers, as it promotes financial stability and reduces the administrative burden of managing multiple small accounts. Automatic portability is particularly beneficial for younger workers and those in industries with high turnover, where frequent job changes are more common.
Key Benefits of Automatic Portability:
Reduces 401(k) Leakage: Automatic transfers between employer plans help prevent early withdrawals and penalties, keeping retirement savings intact.
Simplifies Job Transitions: Employees don’t need to manually roll over their 401(k) when they change jobs, saving time and reducing the chance of losing track of accounts.
Protects Retirement Growth: Funds continue to grow tax-deferred, even after job changes, ensuring employees maximize their savings potential.
Improves Financial Security: Automatic portability promotes long-term financial security by preventing fragmented retirement accounts that are difficult to manage.
Supports High-Turnover Workers: Especially beneficial for industries where employees frequently change jobs, ensuring their retirement savings follow them throughout their career.
8. Stronger Focus on Financial Wellness Programs
The SECURE 2.0 Act also emphasizes the importance of financial wellness programs. With many Americans facing financial stress and not saving enough for retirement, employers are encouraged to integrate financial education and wellness programs into their retirement offerings.
Providing resources such as budgeting tools, personal financial coaching, and guidance on retirement readiness can help employees feel more confident in their financial future.
Bottom Line
The SECURE 2.0 Act brings significant changes to retirement planning, making it easier for workers to save, access emergency funds, and benefit from increased employer contributions. Whether you're just starting to save or nearing retirement, these changes present valuable opportunities to build a more secure financial future.
Stay ahead of these retirement changes. Review your savings plan and consult with a financial planner to take full advantage of the new SECURE 2.0 rules!
Reference
Paychex. (n.d.). Retirement trends. Retrieved from https://www.paychex.com/articles/employee-benefits/retirement-trends
Federal Reserve. (2023). Economic well-being of U.S. households in 2022: Executive summary. Retrieved from https://www.federalreserve.gov/publications/2023-economic-well-being-of-us-households-in-2022-executive-summary.html
Pew Research Center. (2023, December 14). Older workers are growing in number and earning higher wages. Retrieved from https://www.pewresearch.org/social-trends/2023/12/14/older-workers-are-growing-in-number-and-earning-higher-wages/
Yahoo Finance. (2023). Retirement savings changes to expect in 2025. Retrieved from https://finance.yahoo.com/news/retirement-savings-changes-expect-2025-210635218.html
Internal Revenue Service. (2022). SECURE 2.0 guidance. Retrieved from https://www.irs.gov/pub/irs-drop/n-24-22.pdf
Internal Revenue Service. (n.d.). 401(k) plan overview. Retrieved from https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview#:~:text=A%20401(k)%20plan%20is,or%20a%20rural%20cooperative%20plan.
Internal Revenue Service. (n.d.). Retirement topics - catch-up contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions#:~:text=Individuals%20who%20are%20age%2050,403(b)
Investopedia. (n.d.). 401(k) contribution limits. Retrieved from https://www.investopedia.com/retirement/401k-contribution-limits/