The financial landscape is constantly evolving, which means staying ahead of the curve is more critical than ever.
Information is power. Staying informed about key numbers, tax rates, estate planning, and retirement strategies is important. Here are a few things to consider to help navigate the year ahead and beyond:
1. Higher Catch-Up Contributions
Secure Act 2.0 may have been signed into law in late 2022, but it will bring some significant changes to retirement savings, including increased automatic enrollment and contribution rates, expanded catch-up contributions, and required minimum distribution changes this year. One provision that will go into effect in 2025 is Section 109, which enables 401(k), 403(b), and governmental 457(b) plans to offer higher catch-up contributions for participants turning ages 60 to 63 before the end of the year. This could be a great opportunity for pre-retirees approaching retirement.
Some other updates for 401(k) contributors:
- Base contributions increased to $23,500 from $23,000.
- Catch-up contribution for participants age 60-63 increased to $11,250 from $7,500.
- Overall max contribution increased 13.93% to $34,750.
2. RMDs from IRAs
If you inherited an IRA in 2020 or later and do not fall within specific exceptions (spouse, minor child, etc.), you typically must withdraw the entire account balance within 10 years of the account owner’s death. Beginning this year, a key distinction arises: if the deceased account owner was required to take annual RMDs, the beneficiary must also adhere to annual withdrawal requirements. However, if the account owner was not subject to annual RMDs, the beneficiary has greater flexibility to withdraw the entire account within the 10-year timeframe without strict annual distribution mandates. It is crucial to understand these rules to avoid penalties.
3. Tax Brackets
The Internal Revenue Service has shifted tax brackets for 2025. To account for inflation, these adjustments will impact various tax provisions when taxpayers file their returns in 2026. Key changes include increased standard deductions for all filing statuses, adjusted income tax brackets, higher exemption amounts for the alternative minimum tax, and increased limits for various benefits such as the Earned Income Tax Credit, qualified transportation fringe benefits, and flexible spending accounts. Additionally, the foreign earned income exclusion, estate tax credits, and annual gift exclusion amounts have also been increased. It is important to understand how these changes can impact your income and tax liability. Talk to us and your tax advisor to create an optimized tax strategy that takes advantage of all available deductions and credits.
4. Sunset of High Federal Estate Tax Exemption
For high-net-worth individuals, this tax year presents a unique opportunity. The federal estate tax exemption will reach a historic high of $13.99 million, allowing large wealth transfers without incurring estate taxes. However, this exemption is scheduled to drastically decrease in 2026 to $7 million.
To maximize this benefit, you may want to consider whether it is the right time to make substantial gifts to family members or irrevocable trusts before the end of this year. This could shield assets and their future appreciation from potential estate taxes under the lower exemption. Consulting with us and your estate planning attorney is important as you consider the most effective gifting strategies for you, your family, and your legacy.
As this new year unfolds, it is important to stay informed and remain diligent about legislative changes that could affect you, your savings, and your goals.
If you would like to discuss how any of these new rules may impact you, simply reply to this email to set up a time to talk.