Tax changes in 2025 | SECURE Act 2.0
In December 2022, Congress passed a large bill aiming to help Americans save for retirement. The bill, known as SECURE 2.0 (after a similar bill passed 3 years prior) contains numerous provisions – far more than I can discuss today – and today I will hit the most important updates for those of you who are retired or planning to retire within 10 years.
Below is a list of the biggest changes to the bill:
Contribution limits increased
RMD age increased
Increased catch-up contributions
High wage earners Roth catch-up contributions
Contribution limits increased
Almost every year, the IRS increases the contribution limits to retirement accounts to adjust for the effects of inflation. In 2025, the contribution limit for Traditional and Roth IRAs is $7,000; for qualified retirement plans it is $23,500; for SIMPLE IRAs it is $16,500.
Savers ages 50 and older have a higher limit, known as catch-up contributions. The contribution limit for savers 50+ in IRAs is $8,000; for qualified retirement plans it is $31,000; for SIMPLE IRAs it is $20,000.
Contribution limits are determined by your age and the type of account to which you are contributing.
New this year, there are special catch up limits for savers aged 60-63. Please read more below.
Change to RMD age
The IRS allows you to defer your income by making contributions to Traditional retirement accounts or IRAs. When you withdraw money from these accounts, the amount must be included in your taxable income. And even if you don’t need the money from these accounts, the IRS will, at some point, force you to withdraw the money.
SECURE Act 2.0 increased the beginning date for Required Minimum Distributions (RMDs). RMDs begin at age 73 if you were born in 1951-1959. If you were born in or after 1960, your RMD begins at age 75.
Once you reach your RMD age, you must withdraw a certain percentage of your retirement account each year. The percentage is formulaically determined by your age and generally tracks your life expectancy. At age 75, you must withdraw 4% of your retirement account; at age 85, you must withdraw 6.25% of your account, etc.
“If you are 70 ½ and you are writing checks to your church or favorite charity, consider using a QCD to make a tax-free donation instead.”
If you are at your RMD age and you don’t need the income, you can satisfy your RMD by doing a Qualified Charitable Distribution (QCD). Beginning at age 70 ½, you can make a QCD to a qualified church or charity directly from your IRA. The amount of your QCD will not be included in your taxable income.
You may also consider doing Roth conversions to pay taxes on your own schedule, rather than the schedule of the IRS. This strategy works best when implemented after you retire from full-time employment and before you begin Social Security.
Increased catch-up contributions
Beginning in 2025, there is a special contribution limit for employee-savers who are aged 60-63. This limit applies to all qualified employer plans: 401(k), 403(b), Governmental 457(b).
As a reminder, the catch-up contribution limit for those aged 50 and older in 2025 is $7,500. Savers aged 60-63 will have a catch-up limit that is 50% higher than the standard catch-up limit, or $11,250 in 2025. Savers ages 64 and older will be limited to the standard catch-up limit, or $7,500 in 2025.
This chart illustrates the 401(k) contribution limit across different ages.
SIMPLE IRAs also receive a 50% increase between ages 60-63. The standard catch-up is $3,500 and the increased catch-up is $5,250. There is also an increased SIMPLE IRA contribution limit for employees whose employers have fewer than 25 employees. See this article for more information on the new changes to SIMPLE IRA limits.
Catch-up limits for Traditional and Roth IRAs remain unchanged; savers 50+ can contribute an additional $1,000.
High wage earners catch-up contributions
“If you make over $145,000, your catch-up contributions must be made to your Roth account.”
Most people experience their highest earning years after 50 years old. It’s also a time where, with kids out of the house, you may have lower expenses and thus have a greater ability to save. One provision in this bill affects the way high income earners can save in their employer retirement plans (e.g. 401(k), 403(b), governmental 457(b)).
Beginning in 2025, if you are 50+, you earned over $145,000 the prior year, and you elect to utilize your catch-up contribution – that is, to contribute more than the $23,500 contribution limit - your catch-up contributions must be made to the Roth side of your employer plan.
This change is an unwelcome one, as conventional wisdom says you should typically use Traditional contributions to reduce your taxable income when you are in your peak earning years. However, we must play the hand we’re dealt, and if you are in this situation, your only choices are A) put your contributions in the Roth account or B) leave the contributions in your paycheck.
The Roth account will allow your money to grow tax-free forever, but it will be inaccessible without penalty until you are 59 ½ years old or, if you quit your job, 55 years old.
Taking your contributions in your paycheck allows you to spend your money now. I always encourage people to spend the money if they can afford to; you will never again be as young and free as you are at age 55. You can also choose to invest the money in a taxable brokerage account, but any dividends and capital gains incurred in this account would be taxable in the year they are received.
If you are a high wage earner as described above, and your employer’s plan does not allow for Roth contributions, you will not be able to make any catch-up contributions.
About the Author
Joseph Fowler, CFP® is a financial planner and co-owner of 402 Financial in Lincoln, NE.
402 Financial provides financial planning and investment management services to people approaching or in retirement. Joe always acts as a fiduciary and never takes commissions on product sales.
Click this link to schedule a free consultation with Joe.
