Don't Mess With Taxes

Whether your dream retirement is traveling the world or enjoying your own backyard, you need to save now so you can enjoy it. One way to ensure your post-work years are golden is to take full advantage of tax-favored retirement plans. 

Regardless of who wins the White House, the Social Security system is going to get a lot of attention in the coming years.

The aging population, combined with the much ballyhooed birth dearth, is going to put more pressure on Uncle Sam’s retirement program.

Even if the new president and Congress can agree on ways to bolster Social Security, the reality is that in order to have a comfortable retirement, all of us will need additional funds.

Recent tax law changes, particularly catch-up contribution provisions that apply to older workers, and inflation increases can help. Here how in this, Part 8 of the ol’ blog’s annual tax inflation series.

IRA inflation changes: Despite Americans’ complaints, which are being highlighted this year by campaigning politicians, inflation has eased. But it still affects, in an indirect way, the annual tweaks the Internal Revenue Service makes to tax-favored retirement savings plans.

The IRS retirement changes technically rely on the cost-of-living adjustment (COLA), which is based on average annual inflation rates. That's enough of a connection for me to include the yearly changes in the ol' blog's annual 10-part tax-related inflation series.

This year, as evidenced by the slowing inflation rate, these 2025 COLA changes are not as dramatic as it has been in recent years.

That's why the limit next year on how much you can contribute to an individual retirement arrangement (IRA) — and yes, the official name is arrangement, not account, but the popular IRA acronym works either way (and don't get me started on my lingering frustration with the Inflation Reduction Act…) — will remain at the current $7,000.

Even though the amount you can contribute to a traditional IRA with pre-tax dollars will be the same in 2025 as in 2024, it’s still a good retirement savings option for many. It’s particularly appealing to taxpayers who, depending on income, marital status, and retirement options at work, can claim a deduction for at least some of their traditional IRA contributions.

The $7,000 IRA limit in 2025 also applies to the Roth version. Roth IRAs are the preferred savings vehicle for younger workers, who contribute already-taxed money and then don’t have to worry about paying taxing on the Roth IRA funds they eventually withdraw.

Older traditional or Roth IRA owners also can contribute added amounts, known as catch-up contributions. Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 enacted at the end of 2022, these added amounts allowed individuals who are age 50 or older can be bumped up by inflation/COLA adjustments.

But again, that amount is unchanged for 2025. Next year’s IRA catch‑up contribution limit will remain at this year’s $1,000 amount.

More earnings for IRA maneuverability: The IRS' calculations, however, did increase the 2025 income ranges that determine whether you can make tax deductible contributions to a traditional IRA, contribute at all to a Roth IRA, and/or claim the Saver's Credit.

Traditional IRAs are still popular where you or your spouse don't have retirement plans at work. In these cases, you can deduct your full IRA contribution.

If, however, either spouse is covered by a workplace retirement plan, the deductible amount of a traditional IRA contribution is phased out or totally eliminated depending on your filing status and income.

The table below shows how much more you can make in 2025 before you hit the level where your traditional IRA contributions are reduced or are no longer deductible. The table shows 2024 amounts, too, for two reasons.

First, it gives you an idea of the change. Second, you still have time to contribute to, and max out, your 2024 IRA contribution.

More room for Roth contributions: Roth IRA contributions are not tax deductible when you make them, but withdrawals of earnings when you retire are not taxed.

However, there are some income limits on who can contribute to these tax-free retirement savings vehicles. The good news for next year's contributions is that this phase out range increases.

For 2025, the amount you can put into a Roth is reduced if your earnings are within the income range for your filing status in the following table. As in the prior table, the 2024 amounts are included for comparison and tax planning for the rest of this year.

Again, note the top dollar amounts. Once your income exceeds the maximum amount for your filing status, you cannot contribute to a Roth IRA.

You can, however, contribute to a traditional IRA and then convert that account to a Roth IRA.

Just like a traditional IRA, the phase-out range for a married individual making Roth contributions while filing a separate tax return is not subject to an annual COLA and stays at $0 to $10,000.

Workplace plan changes, too: In addition to IRAs, some folks are able to stash retirement money in workplace defined contribution accounts, typically known in the private sector as 401(k) plans.

The tax code monikers for company-provided retirement plans are slightly different for folks employed by other groups. They're known as 403(b) for some nonprofits and teachers, 457 plans for certain government employees, and Uncle Sam's Thrift Savings Plan (TSP) for civil service employees and retirees, as well as for members of the uniformed services. The same COLA changes to 401(k)s tend to apply to these plans, too.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the TSP goes up in in 2025 to $23,500. That's a $500 bump up from the 2024 contribution cap of $23,000.

The workplace plan catch-up contribution limit in 2025 for employees aged 50 or older and who participate in these plans will remain in 2025 at the 2024 limit of $7,500.

The math means that many participants age 50 or older in these workplace plans can contribute a maximum in 2025 of $31,000.

But, a SECURE 2.0 change gives some even older workers a larger catch-up option. The sweeping retirement law allows employees aged 60, 61, 62, and 63 to contribute $11,250 next year instead of $7,500.

And if you're lucky enough to work for a place that has an old-school defined benefit plan — this is where your boss takes total care of your retirement fund — there's a hike here, too. The limitation on the annual benefit of this retirement plan goes from $275,000 in 2024 to $280,000 next year.

Small business plan bump: When you're the boss of your own company, in addition to concentrating on turning a profit, you need to think about the day when you, and your employees, decide to retire.

One option is a SIMPLE, or savings incentive match plan for employees (final, I swear, glossary plug). The limit in 2025 on these retirement plans goes up nominally to $16,500 from the 2024 limit of $16,000. A change made in SECURE 2.0, however, allows some individuals to contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2025, this higher amount remains $17,600.

As for catch-up contributions, the SIMPLE limit for individuals aged 50 or older in 2025 remains at the 2024 level of $3,500. But a SECURE 2.0 change allows for a different catch-up limit for employees aged 50 and older who participate in certain applicable SIMPLE plans. In these cases, the 2025 catch-up limit remains at the 2024 cap of $3,850.

SECURE 2.0 also helps with catch-up contributions for some sexagenarians with SIMPLE plans. Those aged 60, 61, 62, and 63 can in 2025 make catch-up contributions up to $5,250.

Added credit for saving: A tax code bonus for taking charge of your retirement, the Saver's Credit, also potentially is affected each year by inflation. This tax benefit, officially titled the Retirement Savings Contributions Credit, rewards low- and moderate-income individuals for adding to their nest eggs.

This credit, which is a dollar-for-dollar reduction in any tax you owe, is worth a maximum $1,000.

You can claim the Saver's Credit based on the money you put into IRAs and workplace plans, either where you are an employee or are self-employed. But it is not available if you make more than the earnings limit for your filing status.

In 2025, the Saver's Credit maximum earnings caps go to:

• $39,500 for singles and married filing separately taxpayers, up from $38,250 in 2024;
• $59,250 for heads of household, up from $57,375 this year; and
• $79,000 for married couples filing jointly, up from the 2024 limit of $76,500.

Here's the full table and percentages, based on your adjusted gross income (AGI) for the 2025 Retirement Saver's Credit:  

  
And if you're looking to claim the Saver's Credit on your 2024 tax return, you can do so if your income this year falls within the following income ranges:

Donating retirement money: Some people have planned so well for retirement that they can take their time spending the money. Not so fast, says Uncle Sam.

If your retirement funds are in tax-deferred accounts, the Internal Revenue Code requires you to eventually start taking distributions and paying tax on the withdrawals.

These amounts, known as required minimum distributions or RMDs, start at age 72 or age 73, depending on whether you're affected by the SECURE (Setting Every Community Up for Retirement Enhancement) Act 1.0 of 2019 or its 2.0 version enacted at the end of 2022.

If the RMDs started before 2023, the law changes do not affect them. Anyone who turned 72 during or before 2022 follows the RMD rules in place at the start of 2022.

The exact amount is calculated each year after you hit your RMD starting age by using one of the IRS' life expectancy tables. They are found in Appendix B of IRS Publication 590-B.

These tables are created for various lifestyle situations, but most people use the Uniform Lifetime Table, which the IRS updated in 2020. You also can use AARP's online RMD calculator to determine the amount you must withdraw.

Withdrawals from tax-deferred retirement accounts are taxed at ordinary tax rates, which now top out at 37 percent. Depending on how much you've saved, an RMD could be in the tens of thousands. Such a hefty chunk of change could bump you into a higher tax bracket, as well as increase your Medicare costs.

There is some relief here if your RMD-mandated account is a traditional IRA and you don't need the required withdrawal to cover living expenses. You can use the money to make a qualified charitable distribution (QCD).

Here you roll your RMD directly from your IRA to an IRS-qualified charity. The amount meets your RMD for the year, but that amount is excluded from your taxable income.

The base maximum QCD amount you can exclude from your gross income was set at $100,000. But it's also subject to a potential annual inflation increase. The QCD amount goes from this year's $105,000 to $108,000 in 2025.

More inflation tax info on the way: I know some hardcore tax and retirement savings geeks will want even more than is covered in this Part 8 of the ol' blog's annual tax inflation series. Y'all can find that in IRS Notice 2024-80, with all the 2025 COLA changes and Internal Revenue Code retirement plan sections to which they apply.

If, however, you're on the other end of the info spectrum and are feeling overwhelmed by all the retirement plan COLA numbers in this post, I sort of apologize. The sort of disclaimer is because the figures are critical to making the most out of the tax breaks for our nest eggs. To ensure you don't end up eating pet food, or are stuck in a relative's spare room for your not-so-golden year, you need to take retirement saving seriously.

As the box below notes, you can find a directory for the full series at the end of the first post. There you'll find links to already published inflation adjustments, as well as preview of what' on the way.

Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!
   

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