5 Major 401K Changes in 2025 You Need to Know

The Secure Act 2.0, enacted in late 2022, introduces significant changes to 401(k) plans, many of which will take effect in 2025. These changes include automatic enrollment, expanded eligibility for part-time workers, higher catch-up contribution limits for certain age groups, and restrictions on traditional catch-up contributions for high earners starting in 2026, impacting retirement planning and tax implications for individuals in various income brackets.

401(k) Match Options

• 00:05:07 Starting January 1, 2025, employer 401(k) matches can be directed to an HSA or HRA if the employer allows it. Employers can also offer student loan matching, which may vest under a specific schedule. This change offers more flexibility for employees to allocate employer contributions based on their specific needs and financial priorities.

Automatic 401(k) Enrollment

• 00:07:45 Beginning in 2025, employers with 10 or more employees and operating for at least 3 years must automatically enroll employees in their 401(k) plans. The employer sets the initial contribution rate, typically between 3% and 10%, and can implement annual increases. Employees can adjust contributions, but it's essential to understand the impact on employer matching to avoid missing out on free money.

Part-Time Worker Eligibility

• 00:10:35 The 401(k) eligibility requirements for part-time workers are changing in 2025, reducing the required work hours from 1,000 hours per year or 500 hours over three consecutive years to 500 hours over two consecutive years. This broadens access to 401(k)s for individuals working fewer hours, with a combined employee contribution limit of $23,500 across all plans.

Catch-Up Contribution Limits

• 00:12:17 Changes are coming to catch-up contribution limits in 2025. Individuals aged 50 to 59 and 64 and older can contribute up to $7,500 in addition to the regular contribution limit. Those between 60 and 63 can contribute an extra $1,250 on top of the standard limit. These increases aim to help older workers make up for lost time in retirement savings, especially given that many in this age group lack sufficient funds for retirement.

Roth 401(k) Conversion

• 00:25:26 Individuals can convert their traditional 401(k) to a Roth 401(k) through an in-plan conversion or by rolling it over to a Roth IRA after leaving their job. This involves paying taxes on the converted amount, which can be strategically managed using a high-yield savings account to avoid impacting compound growth within the 401(k). A five-year holding period applies before tax-free withdrawals are permitted.

Roth IRA Conversion

• 00:32:35 Converting a traditional 401(k) to a Roth IRA after leaving a job involves paying taxes on the converted amount in the year of conversion. The converted funds are then subject to a five-year holding period before withdrawals are allowed, regardless of age, with earnings remaining subject to the 59 1/2 rule. This method offers the ability to separate contributions, conversions, and earnings, unlike Roth 401(k)s.

High Earner 401(k) Changes

• 00:44:25 For high earners making over $145,000, 2025 is the last year to make traditional catch-up contributions to their 401(k)s. Starting in 2026, only Roth options will be available for catch-up contributions. This could result in higher tax payments for high-income individuals in their 50s or 60s, prompting careful planning and consideration of different strategies for optimizing retirement savings and tax implications.

401(k) Contributions with Debt

• 00:54:46 Whether to contribute to a 401(k) while carrying significant debt depends on individual circumstances. It is generally advised to prioritize basic expenses and build a rainy-day fund before contributing to a 401(k). While Dave Ramsey's advice is to pause 401(k) contributions until debt is paid off, the speaker suggests at least contributing up to the employer match to leverage free money. If an employer match is not provided, pausing contributions until high-interest debt is eliminated is a prudent approach.