Maximizing IRAs, 401(k)s in a fast-shifting retirement space

This year promises to bring significant developments in the IRA and small business retirement space as a convergence of policy shifts, tax reform discussions and evolving workforce demographics reshape the 2025 retirement landscape. Advisors and wealth managers should pay careful attention to the changing environment to best position their clients for long-term success.

Of the numerous Secure 2.0 provisions reshaping the IRA and retirement plan landscape, two are already in effect. As of Jan. 1, 401(k) and 403(b) plans that were created after Dec. 30, 2022 are now required to include automatic enrollment and automatic escalation features. 

This change will almost certainly lead to a greater number of automatic rollovers going to protected IRAs, as individuals who leave their place of employment often don't make an election regarding their plan accounts when their balance is small.

READ MORE: 5 changes for IRAs and 401(k)s in 2025

Also new for 2025 is the "super catch-up" contribution that allows retirement savers aged 60 to 63 to bolster their savings at an important period in their financial planning.

Complicated catch-ups

Starting in 2026, all catch-up contributions from plan participants who earned more than $145,000 during the previous year must be made on a Roth basis, which presents a major complication for plan sponsors and recordkeepers. The bright side for small employers is that SIMPLE IRA plans are exempt from the Roth catch-up requirement, and the super catch-up is available to SIMPLE IRA plans.

To help implement the legislative changes made by Secure 2.0, the Department of Labor and the IRS still have regulatory agendas to fulfill. For the IRS, this includes guidance on rollovers from 529 college savings plans to Roth IRAs; updates to existing IRA regulations, including Roth, SEP and SIMPLE IRAs; and the new saver's match coming in 2027. 

Also on the IRS agenda are safe harbor rules for missing participants and uncashed checks. Advisors should also be aware that the IRS regulations implementing the Secure 1.0 changes to the beneficiary distribution rules became effective Jan. 1, 2025, while some of the Secure 2.0 beneficiary changes go into effect in 2026. 

READ MORE: Regs proposed on 401(k) enrollment, Roth IRA 

Guidance delayed

Historically, newly installed presidential administrations have put a temporary "regulatory freeze" on pending rules, which may delay the release of IRS and DOL guidance. Moreover, this administration has ordered agencies to identify 10 regulations to eliminate for every new regulation proposed in fiscal year 2025, and that the total cost of new and repealed regulations be less than zero.

Although the DOL has a much shorter list of yet-to-be-issued Secure 2.0-related guidance, it must still decide how to proceed with its newest investment fiduciary regulations. 

Last year, two courts postponed the effective date of these new rules pending the outcome of  two lawsuits accusing the DOL of overstepping its authority by broadening the definition of fiduciary advice. The DOL first appealed that decision but in February requested the appeals process be put on hold for 60 days while the new administration determines whether to continue pursuing the appeal.

'Rothification'?

Financial advisors should also pay close attention to tax reform as a key element of policy change impacting retirement savings. The end of the 2017 tax cuts will be a serious fiscal issue for Congress as it finds ways to replace the revenue losses accompanying an extension of these cuts. Lawmakers will also need to make up for the cost of other cuts and spending that the administration wants, such as a proposal to end income tax on Social Security retirement payments.

With the retirement savings incentives typically targeted as a source of tax revenue, the Trump administration will not likely want to limit contributions on a pretax basis or reduce the account balance that can be held.

READ MORE: How advisors can help clients get the most out of Roth IRAs

Instead, "Rothification" could again be invoked as a means of boosting short-term tax revenue. Broadly, this means requiring that certain contributions be made as Roth after-tax contributions rather than pretax, creating immediate tax revenue for the federal government. It is important that financial advisors monitor legislative developments and talk with their clients about ways to maximize tax-advantaged savings in this changing environment.

By staying ahead of trends and abreast of policies, financial advisors and wealth managers can help clients optimize retirement savings strategies. Advisors who remain proactive and adaptable will be best positioned to serve their clients effectively in 2025 and beyond.