The SECURE 2.0 Act has introduced several positive updates to retirement savings rules, enhancing benefits for those using Individual Retirement Accounts (IRAs). While changes aim to help individuals save more effectively, knowing the updated rules is essential for maximizing retirement contributions and withdrawals. Whether you have a traditional or Roth IRA, being informed about these changes is crucial, as many updates apply to both account types.
Here are four significant changes to IRAs rolling out in 2025:
Catch-up
Starting in 2025, individuals aged 60 to 63 will enjoy increased catch-up contributions. Catch-up contributions are designed to allow people aged 50 and older to make additional deposits into their retirement accounts, compensating for lower savings during earlier career years. In 2024, the catch-up contribution limit stands at $1,000, which brings the total contribution limit to $8,000 when added to the standard contribution.
However, for 2025, individuals aged 60 to 63 will be allowed to contribute the greater of $10,000 or 150% of the inflation-adjusted 2024 catch-up contribution. This higher limit could potentially offer a significant boost to retirement savings, allowing eligible individuals to add up to $10,000 annually, which is $2,000 more than the previous year’s limit.
SIMPLE
For workers using SIMPLE IRAs, the new rules also bring enhanced savings opportunities. As of 2024, the annual employee deferral limit for SIMPLE IRAs is $16,000, with an additional $3,500 catch-up contribution permitted for individuals aged 50 and older, totaling $19,500.
In 2025, those aged 60 to 63 will benefit from a higher catch-up contribution limit, which will be the greater of $5,000 or 150% of the standard catch-up amount for individuals aged 50 and older. The catch-up contribution will be adjusted annually for inflation beginning in 2026, allowing employees to maintain their savings potential in line with rising costs.
New 10-Year Rule
A significant change is coming for inherited IRAs starting in 2025. Those who inherited an IRA from someone who passed away on or after January 1, 2020, will have new rules to follow. The main change is the introduction of a 10-year rule, which requires beneficiaries to fully withdraw the funds from the inherited IRA by December 31 of the tenth year following the original owner’s death.
This update effectively ends the “stretch IRA” strategy, which previously allowed beneficiaries to spread withdrawals over their lifetime, letting the account grow tax-deferred for a longer period. Some exceptions exist, allowing certain beneficiaries to continue using the stretch strategy. These exceptions include surviving spouses, children under 21, beneficiaries who are not more than 10 years younger than the deceased, and individuals with chronic illnesses or disabilities.
Surviving spouses have additional flexibility, such as rolling the inherited funds into their own IRA and deferring withdrawals until they reach their required minimum distribution (RMD) age.
RMD Penalties
In 2025, penalties for failing to take required minimum distributions (RMDs) will take effect again, after a temporary pause due to rule changes and the COVID-19 pandemic. Between 2021 and 2024, the IRS provided relief by waiving penalties for missed RMDs. Starting in 2025, however, the usual 25% penalty will be reinstated for individuals who fail to take their RMDs, along with the requirement to withdraw the original amount and pay applicable taxes if the account is tax-deferred.
The penalty waiver period was intended to help account holders adjust to the new rules and avoid confusion during the transition. Now, understanding the RMD requirements is critical to avoiding costly fines.
These upcoming changes to IRAs aim to provide more flexibility and opportunities for savers, especially those nearing retirement age. The increased catch-up contributions and adjusted rules for inherited IRAs can make a substantial difference in long-term retirement planning. As these changes take effect, staying informed and adapting your retirement strategy accordingly will be key to making the most of your IRA benefits.
FAQs
What are catch-up contributions?
Catch-up contributions let those over 50 contribute extra to retirement accounts.
How much will people aged 60-63 contribute in 2025?
They can contribute $10,000 or 150% of the 2024 limit, whichever is higher.
What is the new 10-year rule for inherited IRAs?
Funds must be withdrawn within 10 years of the original owner’s death.
Are there exceptions to the 10-year rule?
Yes, exceptions apply to spouses, minor children, disabled individuals, and some others.
What happens if I miss an RMD in 2025?
A 25% penalty applies, plus taxes on the original amount if the account is tax-deferred.
