Tax Facts
2025: New Increased Retirement Contribution Limits
by Prof. Robert Bloink and Prof. William H. Byrnes
Each of the SECURE Acts contained important provisions designed to help taxpayers save for retirement. Notably, however, many of these features were not immediately available and have continued to become effective on a rolling basis in the years since the respective laws were enacted. Starting in just a few short months, many clients will have access to new and valuable retirement features that can help them maximize their retirement savings—especially once they’ve reached their “catch up” years. Taxpayers should pay close attention to the important new provisions that can work to their benefit as we approach the 2025 tax year.
Changes to Catch-Up Rules
For company-sponsored retirement plans (including 401(k)s and 403(b) plans), the catch-up contribution limit remains set at $7,500 in 2025. Starting in 2025, however, a new enhanced catch-up contribution is allowed for taxpayers who are between ages 60 and 63.
The enhanced contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch up contribution limit. The $10,000 limit is indexed for inflation so, for 2025, the enhanced contribution limit is $11,250. Once the taxpayer reaches age 64, the regular (lower) catch-up contribution limit once again applies.
Note that the enhanced catch-up contribution provisions are optional for employers, so taxpayers should reach out to their plan sponsors to determine whether their specific plan allows for the increased limits.
Starting in 2026 (after the two-year delay offered by the IRS), if a taxpayer has income of at least $145,000 for the prior year, the catch-up contribution for the subsequent year must be treated as a Roth contribution. That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income, but can be withdrawn tax-free in the future. The $145,000 amount will also be indexed for inflation in future years.
While the Roth requirement doesn’t officially begin until 2026, taxpayers may wish to begin deferring catch-up contributions to their Roth earlier. Taxpayers who have already reached age 59 ½ can withdraw funds from their Roth 401(k) without penalty or tax liability, but only after five years have passed. Starting the five-year clock sooner rather than later can give these taxpayers the option of tapping their Roth funds earlier if they wish.
It's also important to remember that offering a Roth feature in the first place is optional for employers. Employees should check with their plan sponsor to determine whether the Roth option is available. The IRS has yet to address a situation where an employee is subject to the Roth catch-up requirement and their employer does not offer a Roth option.
Part-Time Employee Eligibility
The rules governing eligibility to participate in a company-sponsored retirement plan are also changing. Beginning as early as January 1, long-term, part-time employees who satisfy certain eligibility requirements must be allowed to participate in the employer’s 401(k).
Under current law, certain long-term part-time employees must be eligible to participate in retirement plans if they have at least 500 hours of service in three consecutive 12-month periods (12-month periods beginning before 2023 are not counted) if they also satisfy the plan’s age requirement. Beginning with the 2025 tax year, the three-year period is reduced to two years, with the goal of granting more taxpayers access to employer-sponsored retirement savings options.
Note that these long-term, part-time employees do not have to be counted in the tests that apply for determining top-heavy status.
It’s also important to note that eligible employees don’t have to receive any employer contributions (including safe harbor contributions) unless they otherwise qualify. When they do, however, they must be credited with one year of service for vesting purposes for each year in which they complete 500 hours of service (even if the plan otherwise imposes a 1,000-hour requirement).
Auto-Enrollment
Starting with the 2025 tax year, the SECURE Act 2.0 requires employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. The minimum auto-enrollment contribution rate will range from 3% to 10%.
Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Under the law, small business employers with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement. Employees also have the option of opting out.
Conclusion
As these and other SECURE 2.0 provisions become effective, the IRS and DOL have released guidance on a rolling basis. Because some questions do remain unanswered, it’s important to continue monitoring new guidance for updates.
Each of the SECURE Acts contained important provisions designed to help taxpayers save for retirement. Notably, however, many of these features were not immediately available and have continued to become effective on a rolling basis in the years since the respective laws were enacted. Starting in just a few short months, many clients will have access to new and valuable retirement features that can help them maximize their retirement savings—especially once they’ve reached their “catch up” years. Taxpayers should pay close attention to the important new provisions that can work to their benefit as we approach the 2025 tax year.
Changes to Catch-Up Rules
For company-sponsored retirement plans (including 401(k)s and 403(b) plans), the catch-up contribution limit remains set at $7,500 in 2025. Starting in 2025, however, a new enhanced catch-up contribution is allowed for taxpayers who are between ages 60 and 63.
The enhanced contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch up contribution limit. The $10,000 limit is indexed for inflation so, for 2025, the enhanced contribution limit is $11,250. Once the taxpayer reaches age 64, the regular (lower) catch-up contribution limit once again applies.
Note that the enhanced catch-up contribution provisions are optional for employers, so taxpayers should reach out to their plan sponsors to determine whether their specific plan allows for the increased limits.
Starting in 2026 (after the two-year delay offered by the IRS), if a taxpayer has income of at least $145,000 for the prior year, the catch-up contribution for the subsequent year must be treated as a Roth contribution. That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income, but can be withdrawn tax-free in the future. The $145,000 amount will also be indexed for inflation in future years.
While the Roth requirement doesn’t officially begin until 2026, taxpayers may wish to begin deferring catch-up contributions to their Roth earlier. Taxpayers who have already reached age 59 ½ can withdraw funds from their Roth 401(k) without penalty or tax liability, but only after five years have passed. Starting the five-year clock sooner rather than later can give these taxpayers the option of tapping their Roth funds earlier if they wish.
It's also important to remember that offering a Roth feature in the first place is optional for employers. Employees should check with their plan sponsor to determine whether the Roth option is available. The IRS has yet to address a situation where an employee is subject to the Roth catch-up requirement and their employer does not offer a Roth option.
Part-Time Employee Eligibility
The rules governing eligibility to participate in a company-sponsored retirement plan are also changing. Beginning as early as January 1, long-term, part-time employees who satisfy certain eligibility requirements must be allowed to participate in the employer’s 401(k).
Under current law, certain long-term part-time employees must be eligible to participate in retirement plans if they have at least 500 hours of service in three consecutive 12-month periods (12-month periods beginning before 2023 are not counted) if they also satisfy the plan’s age requirement. Beginning with the 2025 tax year, the three-year period is reduced to two years, with the goal of granting more taxpayers access to employer-sponsored retirement savings options.
Note that these long-term, part-time employees do not have to be counted in the tests that apply for determining top-heavy status.
It’s also important to note that eligible employees don’t have to receive any employer contributions (including safe harbor contributions) unless they otherwise qualify. When they do, however, they must be credited with one year of service for vesting purposes for each year in which they complete 500 hours of service (even if the plan otherwise imposes a 1,000-hour requirement).
Auto-Enrollment
Starting with the 2025 tax year, the SECURE Act 2.0 requires employers that establish new 401(k) or 403(b) plans to auto-enroll employees in the savings plans. The minimum auto-enrollment contribution rate will range from 3% to 10%.
Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Under the law, small business employers with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement. Employees also have the option of opting out.
Conclusion
As these and other SECURE 2.0 provisions become effective, the IRS and DOL have released guidance on a rolling basis. Because some questions do remain unanswered, it’s important to continue monitoring new guidance for updates.
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