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Impact of 2025 Changes to Retirement Plans: A Look at 401(k), 403(b), IRAs, and Other Retirement Plans

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Anthony Brunson P.A.

Submitted by Anthony Brunson, PA Certified Public Accountants & Business Advisor 

As we embark on a new year, here’s a reminder of the significant changes to retirement plan contribution limits and related adjustments for the tax year 2025 announced by the Internal Revenue Service (IRS). These updates affect a wide array of retirement accounts, including 401(k) plans, 403(b) plans, governmental 457 plans, the federal government’s Thrift Savings Plan (TSP), Individual Retirement Accounts (IRAs), and SIMPLE plans. The changes bring important implications for employees, employers (including government and not-for-profit organizations), and those involved in plan administration, accounting, and financial reporting.  Continue reading to learn about these updates and their impact on you and your organization.

Key Changes to Retirement Plans in 2025

  1. Contribution Limits:
    • 401(k), 403(b), Governmental 457 Plans, and Thrift Savings Plan (TSP):The contribution limit for these employer-sponsored retirement plans will increase to $23,500 in 2025, up from $23,000 in 2024. This increase provides employees with more opportunities to save for retirement while benefiting from tax-deferred growth.
    • Catch-Up Contributions:For employees aged 50 and older, the catch-up contribution limit will remain at $7,500, bringing the total contribution limit for these workers to $31,000 in 2025. However, a new provision under SECURE 2.0 raises the catch-up limit for employees aged 60-63 to $11,250. This change is particularly impactful for those nearing retirement, allowing them to contribute more in their final working years.
    • IRA Contribution Limits:The contribution limit for Individual Retirement Accounts (IRAs) remains unchanged at $7,000. However, the ability to deduct contributions to traditional IRAs and make contributions to Roth IRAs will be affected by new income phase-out ranges, reflecting inflation adjustments.
  2. SIMPLE Plans:The contribution limit for SIMPLE plans will increase to $16,500, up from $16,000. For employees aged 50 and over, the catch-up limit remains at $3,500, while employees aged 60-63 in certain SIMPLE plans can make catch-up contributions up to $5,250.
  3. Income Phase-Outs for Deductions and Contributions:Changes to income limits for deductible IRA contributions and Roth IRA eligibility will also impact individuals’ ability to make tax-deductible contributions. The phase-out ranges for traditional IRAs and Roth IRAs are adjusted to reflect inflation, offering higher income limits for more taxpayers in 2025. For example, the Roth IRA phase-out for single filers increases to $150,000 to $165,000, up from $146,000 to $161,000 in 2024.
  4. Saver’s Credit:The Saver’s Credit, a tax credit designed to encourage retirement savings among low- and moderate-income workers, has seen increases in income thresholds. For instance, the income limit for married couples filing jointly claiming the credit will rise to $79,000, up from $76,500.

Impact on Government and Not-for-Profit Organizations

  1. Increased Savings Opportunities for Employees:For government and not-for-profit organizations offering retirement plans such as 403(b) and 457 plans, these changes present an opportunity to enhance retirement security for their employees. Higher contribution limits and catch-up opportunities allow workers, particularly older employees, to build more substantial retirement savings. This is especially critical for employees in public service or non-profit sectors, where salaries may be lower compared to private sector counterparts, and maximizing retirement contributions becomes an essential tool for financial stability.
  2. Employer Contributions:Employers in the public and not-for-profit sectors may find that employees are contributing more to their retirement plans, which can affect the organization’s overall compensation planning. Employers offering matching or additional contributions to these plans will need to budget for higher employer contributions in line with employees’ increased contributions.
  3. Government-Sponsored Plans (TSP):For federal employees participating in the Thrift Savings Plan, these changes allow them to set aside more funds, helping them to build a secure retirement nest egg. The increase in contribution limits aligns TSP more closely with private sector 401(k) plans, offering federal employees better opportunities for retirement savings.

Impact on Employees

  1. Higher Retirement Savings Potential:The increased contribution limits are a significant benefit for employees, especially those aged 50 and over, who can contribute more to their retirement accounts. The new provisions in SECURE 2.0, such as the higher catch-up limits for employees aged 60-63, are particularly helpful for individuals in the final stages of their careers. This allows older employees to maximize their contributions, potentially making up for years of lower contributions or insufficient savings.
  2. Tax-Advantaged Savings:With the ability to contribute higher amounts to tax-deferred retirement plans, employees can lower their taxable income and defer taxes on the increased contributions until retirement. This provides immediate tax relief and helps employees build their retirement savings more quickly.

Impact on Plan Administration

  1. Recordkeeping and Compliance:The higher contribution limits and adjustments to income phase-out ranges will require plan administrators to update their systems and processes to accommodate increased contribution amounts. This includes ensuring that plan limits are properly enforced and that employees are notified of their new contribution capabilities. Administrators must also ensure compliance with IRS rules and the new catch-up contribution provisions, especially for employees in the 60-63 age range.
  2. Communication to Employees:Plan administrators will need to communicate these changes to employees clearly and effectively. Employees should be informed about new contribution limits, catch-up contribution opportunities, and any changes to eligibility for tax-deductible IRA contributions or Roth IRA contributions. Given that these changes are designed to benefit employees, clear communication will help employees take full advantage of the new opportunities.
  3. Accounting and Reporting:For organizations offering these retirement plans, accounting teams will need to ensure that the correct amounts are deducted from employees’ paychecks and reported accurately in financial statements. The increased contribution limits and changes in plan design may also affect employers’ liability for matching contributions, which must be factored into the organization’s overall financial reporting. Additionally, employers will need to review their retirement plan reporting requirements for compliance with the IRS.
  4. Financial Statement Reporting:Changes in contribution limits and participation rates may impact the financial statement disclosures for retirement plans. Employers will need to ensure that the financial statements properly reflect the increased employer contributions, any changes to the liability for pension obligations, and the overall impact of retirement benefits on organizational costs.

Conclusion

The 2025 updates to retirement plan contribution limits, eligibility rules, and phase-out ranges represent significant changes that will benefit both employees and employers, particularly in the government and not-for-profit sectors. Employees will have greater opportunities to save for retirement, especially older workers and those with lower lifetime savings. Employers will need to adjust their retirement plan administration, ensure compliance with new rules, and update their financial statements accordingly.

For government and not-for-profit organizations, these changes offer a chance to improve the retirement security of their workforce, which in turn may enhance employee satisfaction and retention. However, these changes will also require careful attention to plan administration, accounting, and financial reporting to ensure that all updates are implemented correctly and in compliance with IRS regulations.

Details on these and other retirement-related cost-of-living adjustments for 2025 are in Notice 2024-80, available on IRS.gov.

We are here to help you. Reach out to us today to discuss how these changes impact you and your organization.