How to save the most for retirement under the new rules for 2025

[UNITED STATES] As we approach 2025, significant changes to retirement savings rules are on the horizon, presenting new opportunities for workers to bolster their financial security in their golden years. The SECURE 2.0 Act, passed in late 2022, is set to introduce several key modifications to retirement plans, particularly 401(k)s, that could substantially impact how Americans save for retirement. This article delves into these upcoming changes and provides strategies to help you make the most of your retirement savings.

Enhanced Catch-Up Contributions for Older Workers

One of the most notable changes coming in 2025 is the increase in catch-up contribution limits for older workers. Currently, individuals aged 50 and above can make additional contributions to their 401(k) plans beyond the standard limit. In 2024, this catch-up amount is set at $7,500. However, starting in 2025, workers aged 60 to 63 will be able to contribute significantly more.

The "Super" Catch-Up Provision

Under the new rules, eligible workers between 60 and 63 years old will be allowed to make catch-up contributions of up to $11,250 in 2025. This represents a substantial increase of $3,750 over the general catch-up limit. When combined with the standard contribution limit, these workers could potentially save up to $34,750 in their 401(k) plans in a single year.

Michael Griffin, a Certified Financial Planner at Henssler Financial, emphasizes the importance of taking advantage of this new provision: "If you have the capacity to save additional money, we certainly suggest you do that. However, if you already have quite a lot of money in your retirement account, perhaps the additional catch-up contribution is not that beneficial for you."

Automatic Enrollment in Workplace Retirement Plans

Another significant change set to take effect in 2025 is the requirement for 401(k) and 403(b) plans to automatically enroll workers unless they choose to opt out. This provision aims to address the savings gap in the United States, particularly among younger employees who may be hesitant to start saving for retirement.

Key Features of Automatic Enrollment

Initial enrollment rates will range from 3% to 10% of an employee's salary.

The savings rate will increase by one percentage point each year until it reaches at least 10%, with a cap at 15%.

Employees retain the right to opt out or adjust their contribution rates.

Griffin notes, "We certainly have a saving problem in the U.S., where younger employees don't want to contribute to retirement accounts. You [might] start saving at 3% and look at that [account] five years down the road and say 'Wow, this is benefiting me.'"

Changes to Inherited IRA Rules

The SECURE 2.0 Act also brings modifications to the rules governing inherited Individual Retirement Accounts (IRAs). These changes primarily affect non-spouse beneficiaries who inherit IRAs from individuals who passed away in 2020 or later.

New Distribution Requirements

Starting in 2025, non-spouse beneficiaries of inherited IRAs must take distributions from their accounts every year until the end of a 10-year period, at which point the account must be completely emptied. This new rule replaces the previous "stretch IRA" strategy, which allowed beneficiaries to defer taxes and take distributions at their discretion over their lifetime.

Brett Koeppel, CFP and founder of Eudaimonia Wealth, explains: "If someone receives money from a parent, or really, anyone other than their spouse, that's when these new rules come into effect."

Strategies to Maximize Your Retirement Savings

With these changes on the horizon, it's crucial to adapt your retirement savings strategy to make the most of the new rules. Here are some key strategies to consider:

1. Take Advantage of Increased Catch-Up Contributions

If you'll be between 60 and 63 years old in 2025, consider maximizing your catch-up contributions. This could significantly boost your retirement savings in the years leading up to retirement.

2. Embrace Automatic Enrollment

For younger workers or those new to their jobs, automatic enrollment can be a painless way to start building your retirement nest egg. Consider increasing your contribution rate beyond the initial automatic enrollment percentage if your budget allows.

3. Review Your Inherited IRA Strategy

If you've inherited an IRA or expect to in the future, consult with a financial advisor to understand how the new distribution rules will affect your tax situation and long-term financial planning.

4. Consider Roth Contributions

While not directly related to the 2025 changes, it's worth noting that starting in 2026, high-income earners (those making $145,000 or more) will be required to make catch-up contributions to Roth accounts rather than traditional pre-tax accounts. Consider starting to shift some of your contributions to Roth accounts now to diversify your tax treatment in retirement.

5. Stay Informed and Flexible

Retirement rules and regulations can change. Stay informed about any updates or modifications to these rules and be prepared to adjust your strategy accordingly.

The Importance of Professional Guidance

Given the complexity of these changes and their potential impact on your retirement planning, it's advisable to consult with a financial professional. They can help you navigate these new rules and develop a personalized strategy that aligns with your retirement goals and financial situation.

Rob Williams, managing director of Financial Planning at Charles Schwab, emphasizes the importance of understanding these changes: "These new rules could help you save more for retirement or force you to start withdrawing funds. It's crucial to understand how they will affect your retirement savings and inheritance."

The retirement landscape is evolving, and 2025 will usher in significant changes that could substantially impact how Americans save for their golden years. By understanding these changes and proactively adjusting your retirement savings strategy, you can take full advantage of the new rules to secure a more comfortable financial future.

Remember, retirement planning is a personal journey, and what works best for one individual may not be ideal for another. As you navigate these changes, consider your unique financial situation, goals, and risk tolerance. With careful planning and strategic decision-making, you can leverage these new rules to strengthen your retirement savings and work towards a more secure financial future.