Upcoming Changes to 401(k)s You Should Know About
As 2024 draws to a close, it’s time to start looking to the next year and putting together a financial plan for 2025. Planning out how you’ll allocate your funds, particularly to savings and investment accounts, can provide you with the maximum benefits not only in your investments, but on your taxes as well. Of course, with a new year come new tax and contribution laws for many of these accounts. For many of our clients here at The Accounting Guys, a 401(k) is the primary form of retirement savings, so we’ve compiled some important information that our clients should know about upcoming changes to 401(k) contributions.
Increased Contribution Limit
As with most years, 2025 brings with it an increase in 401(k) contribution limits. The $23,000 deferrals limit set for 2024 will increase by $500, bringing the maximum deduction for 401(k) contributions to $23,500. The catch-up contribution for retirement investors over 50 will remain unchanged at $7,500, continuing to give these late-stage retirement savers a little extra boost.
An Added Boost for Those 60 to 63
While the general catch-up contribution isn’t changing in 2025 for senior savers, a new, additional law offers workers between 60 and 63 years of age an extra boost. Starting in 2025, investors in this age range can make 401(k) catch-up contributions of up to $11,250 on top of the existing $23, 500 deferral limit. Altogether, this means that workers between 60 and 63 years old can defer a total of $34, 750 in 2025. That’s an approximate 14% increase from 2024. This catch-up contribution is available to anyone who turns 60, 61, 62, or 63 in 2025.
Automatic Enrollment by Employers
In the past, your company’s 401(k) was something that you had to opt into. However, retirement savings are tragically low, with nearly a quarter of working Americans currently having no savings for retirement at all. A study by Vanguard Group, one of the largest 401(k) providers in the country, found that 90% of employees who were automatically enrolled in their employers’ retirement plans remained on those plans; so, in an effort to push Americans in the direction of saving for the future, a new law now requires businesses to automatically enroll new employees in the company’s 401(k) plan.
New employees would be enrolled at a contribution rate between 3% and 10% of compensation. Additionally, employers will be required to increase that contribution rate by 1% each year until they hit a maximum of at least 10% of the employee’s compensation. The increase will be capped out at 15% of compensation.
Businesses with 10 employees or fewer, or companies that have been in operation for under three years, will be excluded from this requirement. Current employees that aren’t part of the company’s 401(k) plan won’t be automatically enrolled; this rule applies to new employees only. So, if you’re hired onto a new job in 2025, and you don’t want to be enrolled in your company’s 401(k) plan, make sure you take the time to opt out of it.
Are Flexible 401(k)s in the Future?
While this isn’t being applied to 401(k)s just yet, the IRS recently made a ruling regarding a private, unnamed company’s 401(k) plan that could impact other businesses in the future.
This year, an unnamed employer petitioned the IRS to allow its employees to designate a portion of their 401(k) match to student debt repayments or HRAs instead. The company’s request was approved in August of this year. Now, the business’s employees can specify at the beginning of the year where they want their employer’s matching contributions to go.
While this isn’t a widespread rule for other companies just yet, many are looking at it as a “trial run” of sorts to see how this change might work out for the company and their employees. If the approval is extended to businesses across the nation, it could give American workers the chance to funnel their funds towards other goals besides retirement. But would it be a good idea?
For some, this type of flexibility would allow them to put more money towards retirement by cutting down on existing bills. For example, you may not be maxing out your employer’s 401(k) match because you can’t afford the full contribution while also making necessary payments on medical bills or student loans. In such a case, redirecting these funds towards your existing bills would offer a large benefit.
On the other hand, putting those employer match funds towards existing bills mean you lose out on the power of compounding interest, which would create more earnings for you over time. You might also miss out on some tax incentives.
So, while this particular change may still be on the distant horizon, it’s something worth keeping an eye on—and worth considering how you might use such a change to your benefit in the long term.
Speak with Our Tax Experts about Your Retirement Contributions
As you’re planning your retirement contributions for next year, it’s important to consider the tax implications of your contributions so you can properly plan where to put your funds for a secure financial future. We encourage you to reach out to The Accounting Guys today to schedule a consultation with one of our retirement tax planners in Provo. We’ll discuss the changes to your retirement accounts for 2025 and help you create an effective tax plan for next year.