Expect These Changes To Affect Your Retirement Savings In 2025

According to a recent survey by the American Association of Retired Persons (AARP), a full 20% of Americans age 50 and older have zero money saved for retirement. Even counting those 50-plus year olds who are invested, 61% of that age bracket overall are worried that they'll run out of money after they stop working. It's statistics like these that motivated Congress to pass the Secure Act 2.0 in 2022.

One of the primary goals of Secure Act 2.0 is to encourage the opening of retirement accounts through an automated process. As well, the bill seeks to increase contribution limits into retirement savings for older workers who may have neglected to invest in their younger years.

Even though the bill was enacted several years ago, it's not until now that certain provisions of the legislation become effective. In particular, Americans currently enrolled in or considering popular retirement plans like an IRA, 401(k), or 403(b) will want to be aware of some new rules that could bolster their financial future or make it easier to withdraw funds in the event of an emergency — though you should never cash out a 401(k) early unless no alternative exists. 

In the past, workers who wished to contribute to a company retirement plan had to actively opt-in to participate. However, beginning in 2025, an eligible automatic contribution arrangement (EACA) takes effect. That's a complicated way of saying that new employees will automatically get enrolled and begin making contributions to their company's retirement plan as soon as they're eligible to do so. Additionally, existing employees will also be automatically opted-in to participating in a retirement plan if they're not already doing so. 

That said, participation isn't mandatory. Those who don't wish to enroll or make regular contributions toward retirement can still manually opt out of doing so. However, those knowledgeable about personal finance would caution against such a move. That's particularly true if your employer matches your retirement contributions dollar-for-dollar with their own money until a certain threshold is reached. Neglecting to take advantage of that employer perk is literally like passing up free money. 

One final nuance of the new automatic enrollment policy is that employers get to decide the contribution rate, which can range between 3% and 10%. However, employees can manually select a different amount if they so choose. Going forward, the percentage of income contributed toward retirement ratchets up at a rate of 1% per year until a predetermined maximum is reached. Note that companies with 10 employees or less and/or companies less than three years old are not required to follow the auto-enrollment rules.

Perhaps some of the best news for Americans who may be under-invested for their golden years is that so called "catch-up" contribution limits are rising. Soon-to-be retiring workers between the ages of 60 and 63 can now stuff up to $11,250 into their 401(k) accounts this year, up from the prior limit of $7,500. Similarly, Americans with Simple IRA accounts will now be able to contribute $5,250 compared to $3,500 previously. After 2025, the catch-up contributions will continue to increase at a pace relative to the rate of inflation, similar to how social security cost of living adjustments are determined. 

Besides making contributions, Secure Act 2.0 also relaxes penalties for early withdrawal under certain circumstances. Historically, workers age 59 1/2 and under paid a 10% penalty for early withdrawal of retirement funds. Beginning in 2025, that penalty will be waived for a variety of qualifying hardships. For example, folks with a terminal disease are exempt from penalty, as are victims of natural disasters and domestic abuse. Withdrawals for plain old financial emergencies are also exempt, but with a lower limit than other circumstances: $1,000 per year. 

While this article hopefully illuminates some of the major implications of the 2022 retirement account legislation, note that the full scope of this bill is quite vast. That's not to mention additional changes which will be phased in later. That includes things like penalty-free withdrawals to pay healthcare premiums and higher age thresholds for required minimum withdrawals (RMDs). For a deeper dive, the entire 19 page bill is available from the Senate Finance Committee.