Looking Ahead to 2025: Upcoming Changes to IRAs and 401(k)s That May Affect Your Retirement

Published on November 4, 2024

The changes to IRAs that will be implemented in 2025 apply to Traditional, Roth, and SIMPLE IRAs and 401(k) plans. These include self-directed IRAs and self-directed solo(k)s. Some were passed as part of the SECURE Act 2.0 and are now being phased in. Here are some issues to be aware of, plan for, or to discuss with your trusted advisor.

Upcoming changes to IRAs

• SIMPLE IRAs: catch-up contributions for people aged 60 to 63
Starting in 2025, the catch-up contribution limit for people between 60 and 63 years old and who participate in a SIMPLE IRA plan will increase to $5,250. To qualify for this higher contribution limit, you must turn 60 and/or be no older than 63 within the 2025 calendar year.

• New inherited IRA 10-year rule
Prior to 2020, beneficiaries could take advantage of the “stretch IRA” when they inherited an IRA from someone who passed away. That meant they could take distributions from the inherited IRA over the course of their lifetime (stretching the distribution time horizon) and prolonging tax-deferred growth of the assets within the account.
However, the new rule is that non-spouse beneficiaries who inherited an IRA on or after January 1, 2020 must withdraw all funds in the IRA within ten years. They have until December 31 of the tenth full calendar year following the death of the individual from whom they inherited the IRA.

o If the original account owner had reached RMD age at the time of his/her passing, beneficiaries must continue taking annual distributions.
o If the decedent had not yet reached RMD age, the beneficiaries must still spend down the assets within 10 years but may take the withdrawals at any time within that period.

Exceptions to the 10-year rule are surviving spouses, disabled or chronically ill persons, children under age 21, and a beneficiary who is no more than 10 years younger than the decedent (perhaps a sibling or other relative within that 10-year age range). Anyone who falls into these categories may withdraw funds from the inherited IRA over their lifetime (the stretch) beginning in the year following the decedent’s death. Surviving spouses can transfer the inherited funds into their own IRA and do not have to start withdrawing those funds until they must begin taking required minimum distributions (RMDs).

• Inherited IRA RMD penalties
For beneficiaries who did not take RMDs from their inherited IRAs in 2021 through 2024, the IRS is now implementing its final rule regarding this. Starting in 2025, a 25% penalty will be assessed for those who do not take their RMD on accounts they inherited in 2020 and later.
The 25% amount is less than previous RMD penalties (which were 50% of the amount that should have been withdrawn!). It is possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years. We strongly recommend you consult your trusted tax advisor for guidance on this matter.
Note that the SECURE Act of 2019 increased the RMD age to 72 and then SECURE 2.0 upped the age to 73 for individuals who reach that age in 2023 and later. The changes around inherited IRAs and RMD age confused many people, so the Internal Revenue Service had waived penalties for certain IRAs inherited in 2020 and later.

Upcoming changes to 401(k) plans
• Larger catch-up contributions to 401(k)s for older participants
Like the new limits for SIMPLE IRAs, active 401(k) plan participants who will be between 60 and 63 years old in 2025 can make a bigger catch-up contribution of up to $11,250, effective for the 2025 tax year.

• Automatic enrollment
All 401(k) plans that were in place on or after December 29, 2022 will be required to implement auto enrollment for all qualified employees (some exceptions apply).
o The initial automatic enrollment contribution amount must be at least 3% but not more than 10%.
o That amount is increased by 1% in each subsequent year until it reaches at least 10%, but not more than 15%.
NOTE: The automatic enrollment rule does not mean mandatory participation is required, as employees can change the contribution rate or opt out entirely.

Year-end retirement plan contribution and distribution reminders
• 401(k) plans – The deadline to contribute is December 31, 2024.
• Roth and Traditional IRAs – You always have until the tax filing deadline to make the prior year’s contributions. Therefore, you have until April 15, 2025 to make 2024 contributions. Remember, if you have multiple IRAs, the contribution limit is an aggregate across all accounts. For example, if you own a Traditional and a Roth IRA and your contribution limit is $8000 (including a catch-up amount due to your age), that $8000 is the maximum amount allowed for both accounts combined, not for each.
• Excess contributions – Did you know you pay tax on excess amounts in your account? If you exceed the 2024 IRA contribution limit, you can withdraw excess contributions from your account by the due date of your tax return (including extensions) to avoid paying a 6% tax each year on the excess amounts left in your account.
• Required minimum distributions – Failure to take your RMD on time triggers an excise tax. Your tax professional or financial planner can help you calculate the RMD separately for each IRA that you own other than any Roth IRAs (Roth IRAs are exempt from these distributions until after the death of the owner). You are allowed to withdraw the total amount from one or more of your non-Roth IRAs.

Contact Next Generation with questions about your self-directed IRA

At Next Generation, we provide full account administration and asset custody services for all types of self-directed plans—Traditional, Roth, SIMPLE and SEP IRAs as well as 401(k)s, health savings accounts (HSAs) and education savings accounts (ESAs). While we do not offer investment advice, we do offer lots of client education about the many types of alternative assets allowed in SDIRAs and other plans. If you have questions, we have the answers. Contact our team at NewAccounts@NextGenerationTrust.com or 888.857.8058 or schedule a complimentary educational session to find out more.