Big Changes to Pension Savings Coming in 2025
Significant changes to pension rules are due to take effect in 2025, primarily affecting higher-income workers. These updates, part of the SECURE Act 2.0 passed in 2022 , are aimed at expanding retirement savings options and making things easier for “maximum savers.” With these changes set to take effect next year, here’s what hopeful retirees need to understand now.
Catch-up contributions for pensioners have been increased
Workers approaching retirement age will soon have the opportunity to significantly accelerate their savings. Starting in 2025, employees ages 60 to 63 will be able to make larger supplemental contributions to their 401(k) plans, with new limits set at either $10,000 per year or 150% of the standard supplemental contribution limit. – depending on which amount is greater.
This expansion of catch-up contribution limits provides workers with a valuable opportunity to increase their retirement savings during their peak earning years. More than half of 401(k) participants with income above $150,000 and nearly 40% with an account balance greater than $250,000 made additional contributions in 2023, according to Vanguard’s 2024 How America is Saving Report .
New Roth requirements for highly compensated employees
However, there are important changes to exactly how these 401(k) catch-up contributions can be made, especially for higher-income employees. Additionally, starting in 2025, employees who earned more than $145,000 (adjusted for inflation) from a single employer in the previous year will no longer be able to make pre-tax contributions. These high-income individuals should direct their catch-up contributions to Roth accounts instead. Here’s how to know if now is the right time to convert to a Roth IRA .
Note. This requirement applies to additional contributions to 401(k), 403(b) and 457(b) plans.
What does this mean for your taxes?
With Trump-era tax breaks set to expire next year, the move to mandatory Roth catch-up contributions for high-income earners represents a significant change in tax treatment. Contributions will be made in after-tax dollars and no immediate tax deduction will be available. However, qualified withdrawals in retirement will not be taxed.
Bottom line: plan ahead
As these changes approach, workers should consider reconsidering their current retirement savings strategy. If you are a high earner approaching retirement, evaluate your eligibility for increased additional contributions as well as the tax implications of required Roth contributions.
As always, consult with a financial advisor to understand the long-term implications and explore alternative options. Remember, the most effective retirement strategy is to contribute consistently and let your investments grow quietly over time.