Retirement Savings in 2025: What's Changing and How to Prepare

As we approach 2025, significant changes are on the horizon for retirement savers, thanks to the Secure 2.0 Act and other factors. These changes will impact how much you can save, how you save, and how you access your retirement funds. Let's explore the key changes and discuss how you can prepare for them.

1. Higher Contribution Limits
- The contribution limits for employer-sponsored retirement plans, such as 401(k)s, will increase in 2025. Workers under 50 will be able to contribute up to $23,500, while those aged 50 and above will have a limit of $31,000.
- Additionally, a new "super catch-up" contribution will be introduced for workers aged 60 to 63, allowing them to contribute up to $11,250 over the standard limit, for a total of $34,750.
- IRA contribution limits will remain the same: $7,000 for those under 50 and $8,000 for those aged 50 and above.

2. Automatic 401(k) Enrollment
- 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 aims to increase retirement savings participation by removing the barrier of inertia.
- Employers will begin with a minimum contribution rate of 3% of the employee's salary, which can be increased over time.

3. Easier Access to Emergency Funds
- The SECURE 2.0 Act makes it easier for employees to withdraw funds from their retirement accounts during emergencies. Workers can link their retirement plans to an emergency savings account, allowing annual contributions of up to $2,500 and four penalty-free withdrawals per year.

4. Higher Estate and Gift Tax Thresholds
- The amount of an estate that's exempt from estate tax will increase to $13.99 million per person in 2025, allowing married couples to effectively shield nearly $28 million from the federal estate tax.
- The gift tax exclusion will also increase to $19,000 ($38,000 for couples), allowing individuals to gift more to each recipient without incurring gift taxes.

5. Potential Sunset of Higher Tax Thresholds
- The higher income and capital gains tax thresholds, currently indexed for inflation, are set to revert to their pre-2018 levels in 2026 unless Congress acts to extend them. This change could lead to higher tax rates for many retirees, potentially reducing their after-tax income and affecting their retirement planning strategies.

To prepare for these changes and ensure a secure retirement, consider the following steps:

1. Review and adjust your retirement income strategies: Evaluate your current income strategies and consider adjusting them to account for potential higher tax rates in the future. This may involve rebalancing your portfolio, adjusting your withdrawal rates, or exploring tax-efficient investment options.
2. Maximize Roth conversions: Before the higher income thresholds sunset, consider converting traditional IRA or 401(k) balances to Roth IRAs to pay taxes at your current, lower tax rate.
3. Accelerate taxable income: Consider accelerating taxable income into 2025 by selling appreciated assets, taking required minimum distributions (RMDs) early, or realizing other taxable income.
4. Monitor and adjust tax planning strategies: Stay informed about changes in tax laws and adjust your tax planning strategies accordingly.
5. Consider long-term care insurance: The potential increase in tax rates could make long-term care insurance more attractive, as the benefits are generally tax-free.

By staying informed about these changes and taking proactive steps to prepare, you can better secure your financial future and avoid a "sucker punch" when it comes time to retire.