For retirement savers, the ringing in of the new year will bring more than the usual inflation adjustments to retirement contributions. The retirement legislation known as Secure 2.0 will also continue to phase in, bringing implications for retirement savers and retirees alike.
Here’s a roundup of some of the key retirement-related changes to watch out for in 2025, as well as any planning-related moves to consider.
Thanks to higher inflation, the income limits for tax brackets will be increasing next year. These changes affect the income thresholds for both income and capital gains taxes. The top marginal income tax rate is 37%, for example, but it applies to single filers with incomes of $626,350 or more and married couples filing jointly with $751,600 or more in income. (In 2024, those thresholds were $609,350 and $731,200, respectively.)
Potential Action Items
Realizing capital gains in the 0% range: Higher-income thresholds may enhance the opportunity to sell appreciated securities without any capital gains taxes. For 2025, the 0% capital gains tax rate applies to single filers earning less than $48,350 and married couples filing jointly with incomes less than $96,700.
Assessing the appropriateness of Roth conversions: You’ll owe ordinary income tax when you convert traditional IRA and 401(k) balances to Roth, but higher-income thresholds provide additional headroom to convert without pushing yourself into a higher tax bracket. A series of smaller conversions can often make sense, especially in the postretirement, prerequired minimum distribution phase.
Here’s another set of changes that relate to inflation: Contribution limits to retirement accounts are increasing slightly for 2025. Company retirement plan contributions—whether 401(k), 403(b), or 457—are going up to $23,500 for people under age 50 and $31,000 for savers who are 50-plus. People who will be between the ages of 60 and 63 in 2025 can contribute up to $34,750, thanks to new “super catch-up contributions” that are going to be effected as part of Secure 2.0. The total 401(k) contribution limit—of particular interest to people contributing to aftertax 401(k)s—is $70,000, plus an additional $7,500 for savers over 50.
Meanwhile, IRA contribution limits will stay the same as in 2024: $7,000 for people under 50 and $8,000 for people who are 50-plus. Contributions to health savings accounts, or HSAs, which can be employed as stealth retirement accounts, are increasing as well, to $4,300 for people covered by an individual high-deductible health plan, or HDHP, and $8,550 for people with family HDHP coverage. HSA savers who are 55 and older can contribute an additional $1,000. Note that the income limits that determine eligibility to make Roth IRA or deductible traditional IRA contributions have also increased to account for inflation.
Potential Action Item
If you haven’t revisited your company retirement plan and/or HSA contributions for a while, now is a good time to do so, especially if you’re in a position to make the maximum allowable contributions to your account(s). While you’re at it, make sure you’re maximizing any employer-matching contributions that you’re eligible to receive. And if you’ll turn 50 in 2025, remember that you don’t need to wait until your birthday to make catch-up contributions. I’m a big fan of putting IRA contributions on autopilot with your investment provider, making automatic monthly contributions, just as you do with your 401(k). To make the maximum allowable IRA contribution in 2025, you’d need to contribute $583 monthly if you’re under 50 and $666 a month if you’re 50 and over.
People over age 70.5 can contribute $108,000 to charity via the qualified charitable distribution, or QCD, in 2025. That’s up from $105,000 in 2024.
Potential Action Item
Given that nearly 90% of taxpayers aren’t itemizing their deductions, the QCD is a gimme for charitably inclined people 70.5 and older who have IRAs. Contributed amounts skirt income taxes and also satisfy required minimum distributions for those who are age 73 or above. The QCD will tend to be a better deal, from a tax standpoint, than writing a check to charity and deducting it on your tax return.
The amount of an estate that’s exempt from estate tax will increase to $13.99 million per person in 2025. This means that married couples can effectively shield nearly $28 million from the federal estate tax. Meanwhile, the gift tax exclusion is increasing to $19,000 ($38,000 for couples) in 2025. This means individuals can gift up to $19,000 to each recipient next year without having that amount count toward their gift-tax exclusion.
Potential Action Item
The estate tax exclusion is at its highest level ever, but key provisions of the Tax Cuts and Jobs Act, including the currently high levels of assets that are exempt from federal estate tax, are set to expire at the end of this year. A Republican presidential administration and Congress may well extend them, but a qualified estate planner can help you determine the best strategies to reduce taxation on your estate (not to mention help with other crucial matters such as drafting powers of attorney).
Mark Miller outlined some of the key changes to prescription drug costs for seniors who are covered by Medicare. Specifically, people who are covered by a Medicare Part D plan will now have their out-of-pocket drug costs capped at $2,000 per year starting next year. Moreover, seniors who are enrolled in Part D can opt into a new payment program that enables them to spread their prescription-related costs throughout the year.
Long-term-care insurance has declined in popularity, but there are still millions of policies in force. The amount of long-term-care insurance premiums that one can deduct is going up a bit in 2025. People who are age 40 or under can deduct $480 in long-term-care premiums in 2024; those aged 41 to 50 can deduct $900; people aged 51 to 60 can deduct $1,800; those aged 61 to 70 can deduct $4,810; and those 71 and older can deduct $6,020.
https://www.morningstar.com/retirement/whats-changing-retirement-2025
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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