The new year often brings fresh opportunities, resolutions, and yes—rule changes. As we enter 2025, the IRS has rolled out several updates that could directly impact your retirement planning and investments. These changes aim to expand opportunities for saving, modernize outdated systems, and create new layers of complexity (because why keep things simple?). Whether you’re a small business owner, an employee nearing retirement, or just starting to think about long-term savings, understanding these changes is essential.
While the words “rule changes” might sound dry, don’t go making a second pot of coffee just yet – we’re here to break it down in plain English. Let’s take a closer look at five key updates that could influence your financial decisions this year.
1. Catch-Up Contributions: “Super Size Me!”
Catch-up contributions have long been a helpful tool for those over 50 who want to save more for retirement. In 2025, a new provision will allow workers aged 60–63 to contribute even more to their retirement plans. Here in the office we call it the “Mickey-D’s Provision” as it has been called the Super Size Catch-Up (…not Ketchup)
Enough Fast Food – Here’s some Facts Facts::
- For Ages 60–63: You can now contribute up to $10,000 in additional catch-up contributions, compared to $7,500 for those aged 50–59.
- The Roth Requirement: If you earned more than $145,000 in the previous year, these catch-up contributions must go into a Roth account, meaning they’re made with after-tax dollars.
While this change provides an exciting opportunity for high earners in the final stretch of their careers, the implementation could prove challenging. Payroll systems, plan administrators, and individuals will need to adapt to these highly specific rules. If you fall into this age group, now is the time to check in with your employer and financial advisor to ensure you’re taking full advantage of this benefit.
And if you’re wondering why ages 60–63 were singled out, join the club. This well-intentioned but oddly specific rule is designed to help workers maximize retirement savings during their peak earning years.
2. Changes for Small Business 401(k) Plans
If you’re a small business owner—or work for one—your 401(k) plan may look different this year. These updates aim to expand access and encourage more savings. We’ve spent a good deal of time working with our Retirement Plan partners and clients getting prepared.
Okay my entrepreneurial friends – you are busy enough. We’ll distill this down to two main changes to be aware of:
- Part-Time Workers: Under the new rules, part-time employees who work at least 500 hours annually for three consecutive years will now be eligible to participate in their company’s 401(k) plan. This is a significant shift aimed at including more workers in retirement savings plans.
- Mandatory Auto-Enrollment: Employers must automatically enroll eligible employees into their 401(k) plans, typically starting at a contribution rate of 3-10%. Employees can still opt out, but the default setting is now savings-oriented.
These changes have one goal at heart: Getting more people to save!
By leveraging behavioral economics, the government is nudging more Americans toward financial security. Auto-enrollment removes the inertia that often prevents younger workers from participating, while extending eligibility to part-time workers ensures a broader segment of the workforce has access to retirement savings tools.
For small business owners, these updates come with added responsibilities. If you manage a 401(k) plan, you’ll need to ensure your team understands these changes. Partnering with your financial advisor, plan administrator, or recordkeeper can help smooth the transition and avoid miscommunication.
3. Roth Expansion for SEPs and SIMPLE IRAs
Previously, contributions to SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) IRAs were limited to pre-tax dollars. Starting in 2025, that restriction has been lifted:
Roth Contributions Allowed! SEP and SIMPLE IRAs can now accept Roth contributions.
This change opens up new possibilities for tax diversification. Roth contributions are made with after-tax dollars, but they grow tax-free and can be withdrawn tax-free in retirement. For young workers or those in lower tax brackets, Roth accounts are especially advantageous, as they provide decades of tax-free growth.
For small business owners, this update adds another layer of flexibility when choosing retirement plans. If your business uses a SEP or SIMPLE IRA, consider whether offering Roth contributions aligns with the needs of your employees and your own long-term goals.
4. Inherited IRA Rules: A New Layer of Complexity
If you’ve inherited an IRA in the last five years, pay close attention. Changes stemming from the SECURE Act now require some inherited IRA holders to take Required Minimum Distributions (RMDs). Here’s the gist:
- New RMD Requirements: If you inherited an IRA from someone who was already taking Required Minimum Distributions (RMDs), you must continue those distributions annually. This is in addition to the existing rule that requires the inherited account to be emptied within 10 years.
This change primarily affects non-spouse beneficiaries, such as adult children. While the intention is to prevent people from using inherited IRAs as long-term tax shelters, the added complexity creates challenges for both beneficiaries and financial institutions.
If you’ve inherited an IRA in the past five years, now is the time to review your situation. Failure to take the required distributions could result in steep penalties—though the penalty for missed RMDs has been reduced from 50% to 25%, it’s still a costly mistake.
Bottom Line: Inherited IRAs are not a “set it and forget it” situation. Consult with your financial advisor or tax professional to ensure you’re meeting the requirements and avoiding unnecessary penalties.
5. Social Security: A Pay Raise for Retirees
Good news for retirees: Social Security benefits just increased again in January 2025, with a 2.5% cost-of-living adjustment (COLA). This brings the total adjustment over the last four years to nearly 22%.
Not convinced that this helps? A $2,000 monthly benefit at the end of 2020 is now approximately $2,400…an additional $4,800 per year.
While these increases help retirees keep up with inflation, they also highlight the financial strain on the Social Security system. The program’s funding shortfalls are no secret, and addressing them will require difficult decisions in the future.
However, for now, retirees can rest assured that their benefits are safe. Despite concerns about the program’s long-term viability, Social Security remains a critical safety net for millions of Americans, and lawmakers are unlikely to let it falter.
If you’re nearing retirement, remember that Social Security is just one piece of the puzzle. Pair it with other income sources—like retirement savings and investments—to create a comprehensive plan.
Planning for 2025 and Beyond
These changes underscore a central truth about financial planning: staying informed and proactive is essential. Whether you’re a small business owner managing a 401(k), an individual navigating inherited IRA rules, or a retiree budgeting for the future, understanding the landscape is key to making smart decisions.
Here’s how you can stay ahead:
- Maximize Contributions: If you’re eligible for catch-up contributions or have access to Roth options, take full advantage. These options are tools that can significantly enhance your retirement savings.
- Understand Your Benefits: Whether it’s Social Security or an employer-sponsored retirement plan, make sure you’re aware of what’s available to you and utilize it!
- Seek Professional Guidance: Financial rules are becoming increasingly complex. A trusted advisor can help you navigate the changes and create a strategy tailored to your goals.
The road to financial security is rarely straightforward, but with the right tools and knowledge, you can make 2025 a year of progress and growth. Now’s the time to take charge of your financial future.
