Who is ready for 2025?

My friends, it’s that time of year again.  As we wrap up 2024, and look around the corner at the New Year, the folks at the IRS have re-set the annual limits for various account types.  Let’s take a closer look at what’s on tap for next year. 

For clients who are still saving money towards retirement, 2025 will allow for additional tax-deferred and tax-free savings.  As financial planners, we’re happy to see these numbers increase!  Many clients will need to communicate with their HR offices to make changes to their paycheck withholding to ensure maximum withholding. 

Workplace Plans

TSP, 401(k), 403(b), and 457 plans have new contribution limits of $23,500.  For those age 50 and over, the catch-up provision will remain at $7,500, meaning a total of $31,000 can be contributed. 

A new catch-up provision is being added in 2025 for those with birth years 1962, 1963, 1964 and 1965, which will allow for deferrals of $11,250 (instead of $7,500).  Added to the base of $23,500, folks born in these years will be eligible to contribute $34,750 to their workplace plans. 

Plans For the Self-Employed

For SIMPLE IRAs, the contribution limit is now $16,500.  For those age 50 and over, the catch-up provision is still in place and is now $3,500, meaning a total of $20,000 can be contributed. 

A new catch-up provision is being added in 2025 for those with birth years 1962, 1963, 1964, and 1965, which will allow for deferrals of $5,250, instead of the standard $3,500.  This means that folks in these birth years will be eligible to add $21,750 to their SIMPLE IRAs. 

Those using a SEP IRA have a limit of the lesser of 25% of compensation, or $70,000. 

And, for those who are using individual 401(k) plans, the maximum defined contribution limit has increased to $70,000.  For those age 50 and over, the catch-up provision is still in place and is now $7,500, meaning a total of $77,500 can be contributed. 

A new catch-up provision is being added in 2025 for those with birth years 1962, 1963, 1964 and 1965, which will allow for deferrals of $11,250 (instead of $7,500).  It means folks born in these years will be eligible to contribute $81,250 to their i401(k). 

IRAs and Roth IRAs

Contributions to Roth and Traditional IRAs will remain at $7000 as the maximum contribution.  For those age 50 and over, the catch-up provision is still in place and remains unchanged at $1,000, meaning a total of $8,000 can be contributed. 

As always, there are some income rules when making contributions to both IRAs and Roth IRAs.  If you would like to contribute to an IRA or Roth IRA in addition to your workplace plan, please talk with us to make sure you’re eligible.  We can also review the possibility of doing backdoor Roth contributions, as well as Roth conversions. 

Other Account and Tax News

In non-retirement news, many clients are looking to gift periodically to family members or friends.  In 2025, the gift exclusion amount increases to $19,000. 

For those who have high deductible health plans, and are eligible to contribute to HSAs, we’re excited to share that the self-only contribution limit will be increased to $4,300, and the family contribution limit will increase to $8,550. For those age 50 and over, an additional $1,000 can be contributed. 

Flexible spending accounts will also see an increase in 2025.  The Health FSA limit is now $3,300.  The Dependent Care FSA maximum is still not eligible for inflation adjustment and will remain at $2,500 for married filing separately, and $5,000 for singles and married filing jointly. 

Pre-tax commuter and parking contribution limits are increasing to $325 for the year. 

A new benefit born out of the CARES Act in 2020 is the ability for employers to contribute to employee student loan repayment.  If the benefit is less than $5,250 a year, the repayment is excludible from employee wages.  Benefits over this amount are included in wages and are taxable to the employee.  Most employers do not currently offer this benefit, but the companies that do have started to increase substantially over the past few years.     

Also, thanks to Secure Act 2.0, which passed in December 2022, there is a new provision available in 2024: employers can count student loan repayments towards 401k matching benefits.  This has the potential to be very helpful, especially for more recent graduates and for lower income employees.  This said, as with any new provision, there are logistics to work out before there is widespread adoption among employers and plan providers.  For now, it’s worth an ask to your HR department to see if this provision is available for your company’s retirement plan and if it is, what you need to do to participate. 

Lastly, starting earlier this year, unused 529 funds up to $35,000 can be rolled over to a Roth IRA on behalf of the beneficiary. Many custodians were not ready for this logistic in January, but all of them have gotten up to speed over the course of the year.  There are a number of conditions and rules for these rollovers, so they’re often not as straightforward as we’d like.  This said, we’re happy to help look into your family’s old 529 plans, the rules that apply, and help facilitate a rollover if applicable. 

If you have any questions about this information, or wonder whether it can or does apply to you and your situation, please give us a call.  We would be happy to discuss your specific circumstances.

Source:  IRS.gov

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