As we stand on the verge of 2025, I’m reaching out to share some key financial planning information, tailored primarily to those approaching or in retirement given the focus of my practice. I hope you find this helpful as you plan for the upcoming new year.
First, several provisions of the SECURE 2.0 retirement savings legislation (which was enacted in 2022 and I have previously addressed) are scheduled to come into effect in 2025. Notably, these include:
- For participants aged 60 to 63, catch-up contribution limits for qualified retirement plans (401(k) and 403(b) will increase significantly, to help older workers boost their retirement savings in the years leading up to retirement. The new limit (sometimes referred to as the “super” or “enhanced” catch up rule) will be the greater of $10,000 or 50% more than the regular catch-up amount. Given the standard catch-up amount will be $7,500 next year, the enhanced catch-up limit will therefore be $11,250 (= $7,500 * 1.5) for those in their early 60s.
- Similarly, catch-up contributions for those aged 60 to 63 will increase for those who utilize SIMPLE IRAs. The new limit will increase to the greater of $5,000 or 150% of the regular catch-up amount. This translates to an enhanced catch-up limit of $5,250 for 2025.
- Starting next year, certain heirs with inherited individual retirement accounts must take yearly required withdrawals or face a penalty. The IRS previously provided transitional relief for beneficiaries who did not take RMDS from 2021 through 2024; however, beginning in 2025, a 25% penalty will be assessed for those who do not take their RMD. For those seeking additional clarity regarding the rather intricate rules for IRA beneficiaries, here is a useful article for reference.
- New 401(k) and 403(b) plans will be required to automatically enroll eligible participants. The initial automatic enrollment must be at least 3% but not more than 10% of the employee’s pay. Additionally, the enrollment amount must increase by 1% each year until it reaches at least 10%, but not more than 15%.
- Part-time employees who have completed at least 500 hours of service for two consecutive years will become eligible to participate in 401(k) plans.
And here are some additional figures to note:
- Social Security and Medicare:
- Social Security recipients will receive a 2.5% increase in their benefits for 2025.
- The basic Medicare Part B monthly premium rises to $185 per person. Higher-income individuals, starting at $106,001 for single filers and $212,001 for joint filers, are subject to higher premiums, known as “IRMAA” (Income Related Monthly Adjustment Amounts). Medicare Part D, the prescription drug benefit, is also subject to IRMAA thresholds. The Centers for Medicare & Medicaid Services (CMS) indicates that the average total monthly premium for Medicare Part D plans is projected to be $46.50 in 2025.
- Marginal Federal Tax Rates:
- The top tax rate remains 37% for individual single taxpayers with taxable incomes greater than $626,350 ($751,600 for married couples filing jointly).
- Other rates include:
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly);
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly);
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly);
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly);
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly);
- 10% for incomes for incomes of $11,925 or less ($23,850 or less for married couples filing jointly).
- Standard Deduction:
- For single taxpayers and married individuals filing separately, the standard deduction increases to $15,000 for 2025, up $400.
- Heads of households will see a jump to $22,500, an increase of $600.
- For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800.
- Taxpayers 65 and older and those who are blind can claim an additional standard deduction. The additional standard deduction amount for 2025 is $1,600 ($2,000 if unmarried and not a surviving spouse).
- Alternative Minimum Tax (AMT):
- The AMT exemption amount for tax year 2025 for single filers is $88,100 and begins to phase out at $626,350 ($137,000 for married couples filing jointly, with the exemption beginning to phase out at $1,252,700).
- Investment and Retirement:
- Long-term capital gains and qualified dividends continue to be taxed at rates of 0%, 15%, or 20%, depending on overall taxable income. These figures do not include the 3.8% Medicare surtax on so-called net investment income for singles earning more than $200,000 and couples earning more than $250,000, as mandated under the Affordable Care Act.
- The maximum IRA contributions remain $7,000 for those younger than 50 and $8,000 for those age 50 and up.
- Eligibility income ceilings for Roth IRA contributions increase, with contributions phasing out at adjustable gross income thresholds of $236,000 (up from $230,000) to $246,000 (up from $230,000) for married couples filing jointly, and $150,000 (up from 146,000) to $165,000 (up front $161,000) for single filers.
- The annual contribution limit for employees participating in 401(k), 403(b), and most 457 plans increase to $23,500 (from $23,000) for those younger than 50, and $31,000 (from $30,500) for those age 50 and up. reflecting the aforementioned standard $7.500 contribution limit. For those with more than 15 years of service, 403(b) plans afford an additional catch up of $3,000 each year, until one reaches a total of up to $15,000 in contributions.
- Contribution limits on profit-sharing plans and SEP-IRAs increase to $70,000 (from $69,000). For those age 50 and above, the limit increases to $77,500 (from $76,500), but only for those who use profit-sharing plans (SEP-IRAs do not permit so-called “catch-up” contributions).
- Qualified Charitable Distribution (QCD):
- IRA owners aged 70 ½ and older are entitled to make tax-free distributions to qualified charities, up to a certain amount annually. In 2025, the aggregate threshold increases to $108,000 from $105,500.
- Health Savings Account (HSA):
- HSA contribution thresholds increase to $4,300 for individuals and $8,550 for families. Those aged 55 (note, not 50) and older are eligible to make an additional $1,000 catch-up contribution (which is not adjusted for inflation).
- Estate and Gift Tax:
- The federal estate, lifetime gift, and generation-skipping tax exclusions, which remain uniform and indexed annually to inflation, increase to $13,990,000 per person ($27,980,000 per married couple). The top tax rate remains 40%.
- Annual Gift Tax Exclusion:
- The annual gift tax exclusion, representing the amount one can give to another person without it counting against the lifetime exclusion, increases to $19,000 (from $18,000).
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As you may already know, numerous provisions of the current tax regime, stemming from the 2017 Tax Cuts and Jobs Act, are scheduled to expire at the end of 2025 unless extended by Congress. These include tax rates and brackets, standard deductions, the alternative minimum tax, the lifetime estate and gift tax exemption, the cap on state and local tax (a.k.a. “SALT”) deductions, and the 20% qualified business income (QBI) deduction. In light of the Republican party controlling both the executive and legislative branches, experts now, unsurprisingly, anticipate most, if not all, of these provisions to be extended. However, given the potential impact on the federal budget deficit, many key details are still expected to be subject to extensive negotiations.
As always, if you need any assistance, please don’t hesitate to reach out. Wishing you and your loved ones a wonderful holiday season and all the best in the coming year.
Sources: IRS.gov, Kiplinger’s Tax Letter, U.S. Centers for Medicare and Medicaid Services, Urban Institute & Brookings Institution Tax Policy Center.
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