Retirement Planning in 2025: What You Need to Know
As we enter a new year, it’s essential to stay ahead of the curve when it comes to retirement planning and finances. With over 20 provisions of the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025, experts predict that many of these provisions will either be extended or made permanent.
Tax Rates and Roth IRA Conversions
One significant provision is the reduced top income tax rate for individuals, which will revert to 39.6% if Congress doesn’t act. To mitigate this increase, consider accelerating income recognition before the tax rate increases and delaying harvesting losses until 2026. A Roth IRA conversion, which involves paying taxes on the converted amount now, may not be as pressing if the current tax provisions are extended.
State and Local Tax Deductions
The Tax Cuts and Jobs Act capped the state and local tax (SALT) deduction at $10,000 per tax return from 2018 to 2025. This cap is set to expire in 2026, potentially restoring the full deduction for state and local taxes. This change would primarily benefit high-income taxpayers in states with high taxes.
Estate and Gift Tax Exemption
The TCJA significantly increased the current estate and gift tax exemption, which will decrease to around $7 million if the exemption rules sunset. High net-worth families could realize a significant increase in transfer tax, making it essential to consider using their exemption before it’s reduced in 2026.
Retirement Contributions and Catch-Up Provisions
Several provisions of the SECURE 2.0 Act will go into effect in 2025, including higher catch-up contributions for certain employees. Additionally, individuals inheriting an IRA will no longer be able to wait until the 10th year to withdraw the funds, and new regulations clarify that beneficiaries must withdraw funds at least as quickly as the original owner was doing.
Health Savings Accounts
Maximizing contributions to a health savings account (HSA) is crucial, as HSAs can be used to pay qualified health care expenses during retirement. Contributions to an HSA are made pretax, allowing you to lower your taxable income, and the funds grow tax-free.
Expert Advice
Experts recommend reviewing your financial strategy in light of these changes. Consider accelerating income recognition, delaying harvesting losses, and maximizing retirement contributions. Additionally, take advantage of HSAs and other tax-advantaged savings vehicles to ensure a secure retirement.
By staying informed and adapting to these changes, you can make the most of your retirement planning and finances in 2025.
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