BST & Co. CPAs, LLP, one of the Capital Region’s leading accounting and management consulting firms, today offered perspective regarding a significant catch-up contribution policy to workplace retirement plans that will be allowed by the IRS for older workers in the New Year. Additionally, many employers will be required to implement an auto-enrollment feature to all new qualifying 401(k) plans in 2025.
The new contribution mandate will go into effect beginning in January, offering older employees the opportunity to contribute a total of $34,750 to their 401(k) plans, which includes a catch-up tier of as much as $11,250. The update represents the biggest change to 401(k) contribution limits in nearly two decades and applies to workers who will be between the ages of 60 and 63 by Dec. 31, 2025. This change stems from the Secure 2.0 Act, which was enacted by Congress in 2022.
“Catch-up contributions make a world of difference for older workers who didn’t begin saving for retirement early in their careers,” said Bob Canterbury, Senior Wealth Advisor with Dopkins Wealth Management, BST’s wealth management partner. “Another benefit of these catch-up contributions is that they lower the amount of taxable income for individuals who take advantage of this opportunity.”
Meanwhile, employees who did make healthy contributions to their retirement plans can still reap the rewards if they are within the designated age group and would like to bolster their savings for the future. Some highlights of additional changes for 2025 listed by the IRS on its website include:
- The contribution limit for all employees increases by $500 in 2025, to a total of $23,500, up from $23,000.
- The catch-up contribution limit that generally applies to employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans and the federal Thrift Savings Plan remains $7,500 for 2025. These employees may contribute up to a total of $31,000 to these various retirement plans.
- The limit on annual contributions to an IRA remains at $7,000, while the IRA catch-up contribution limit for individuals aged 50 and over was amended to include an annual cost-of-living adjustment but remains at $1,000 for 2025.
“These adjustments by the IRS are designed to help American workers save for retirement, which should be a priority for everyone. By allocating a larger portion of their salary for retirement, workers can gain an immediate benefit by reducing their taxable income while at the same time strengthening their financial security in the future,” Canterbury said.
New Auto Enrollment Requirements for Retirement Plans
Another change stemming from the Secure 2.0 Act is a requirement for employers to automatically enroll employees in qualifying 401(k) plans in the New Year. The mandate is designed to incentivize more American workers to participate in employer-sponsored retirement plans – often the most popular method of saving for retirement.
Under the Secure 2.0 Act, employers with 401(k) or 403(b) plans must automatically enroll qualified employees at a minimum 3% contribution rate beginning in 2025 with corresponding increases of 1% in each subsequent year until reaching 10%; however, employees may choose to opt out of the automatic enrollment.
However, businesses with existing 401(k) or 403(b) plans that predated the passage of the Secure 2.0 Act in December 2022 are exempt from the auto-enrollment mandate. Additional exemptions apply to:
- Small businesses with 10 or fewer employees
- Businesses that have been operating for less than three years
- Churches and Governmental retirement plans
The mandate also reduces the amount of time required for part-time workers to qualify for employer-sponsored plans and provides tax credits – valued at up to 100% of retirement plan administrative costs – to businesses with up to 100 employees as an incentive to adopt such plans.
“Auto enrollment is designed to elevate awareness among employees of the importance of saving for retirement,” Canterbury said. “It’s also one of the leading questions that I receive from business owners in terms of eligibility and requirements. I would encourage all plan administrators to check with their financial representatives or advisors about these new mandates that will take effect in January 2025.”
Staying ahead of all changes to tax laws for individuals and businesses of any size is part of the suite of services offered by BST and partner Dopkins Wealth Management, LLC.
In addition to wealth management, BST offers a broad portfolio of accounting and auditing, tax, consulting, valuation, forensic accounting and litigation support. The firm’s expansive outsourcing division includes accounting, talent strategies and marketing services, available either à la carte or in combination with one another, to deliver tailor-made strategies for businesses and nonprofit organizations at all phases of development.
For more information about DWM visit dopkinswealthmanagement.com. For more information about BST & Co. visit BSTco.com.