As we ring in the New Year, we wish to embrace 2025 to be the best we can be with our financial decision-making. The Bedell Frazier Financial Planning team has compiled a list of the top five financial planning and tax planning considerations.
1. Review Your 2024 Spending, Make a Budget for 2025
Before planning for the New Year take some time to evaluate your spending and savings from 2024.
- Did you find the balance you were looking for between saving and spending?
- Are there any expenses from 2024 that you could cut back on in 2025?
- What budget items would you like to increase in 2025?
- What spending goals are very important to you? Know your why on spending!
Be honest in your evaluation of your past spending and your budget for 2025. The point of this exercise is to reflect on the past year to see where you can improve. Have your goals shifted over the past 12 months? The only constant in life is change.
When budgeting for the New Year identify your essential costs like your housing, transportation, insurance, and groceries. Tackling any credit debt should be at the top of your list to free up cash flow for saving and investing while improving your credit score. Saving for retirement and kids’ education should be the next priorities in your budget. After three years of high inflation, budgeting is more important than ever. The Bedell Frazier Financial Planning Team has a budget template to share – click here.
“I have one life and one chance to make it count for something. I’m free to choose that something… my faith demands that I do whatever I can, wherever I can, whenever I can, for as long as I can.”
Jimmy Carter
2. Max Out Your Retirement Accounts Savings
One of the best moves you can make for retirement success is to maximize your retirement account contributions while working each and every year. For 2025, the new cost of living adjustments from the IRS allows you to contribute $23,500 to your 401(k); an increase of $500 from 2024. For individuals 50 and older, the catch-up remains the same as last year at $7,500.
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0, which passed in December of 2022, rolls out some new features in 2025. We have a new Super Catch-Up for those ages 60, 61, 62, or 63 whose catch-up is increased from standard $7,500 to $11,250. Combined, these workers can defer about 14% more than last year, with a total employee contribution of $34,750 for 2025. These changes also apply to 403(b) and 457(b) plans.
Some other new SECURE Act 2.0 features that go into effect in 2025 and beyond:
Automatic 401(k) Enrollment – Starting in 2025, all eligible employees will automatically be enrolled in their 401(k) plan with a 3% deferral. You can opt-out, but enrollment will be automatic.
401(k) Employer Contributions – Employees can now choose to have their employer’s matching contributions be allocated to a Roth 401(k) rather than the pre-tax 401(k). Roth matches will be taxable at the time they are made. The upside is no Required Minimum Distributions (RMD) with tax-free growth and withdraws. The decision is to pay taxes now or in the future.
Roth Catch-Up Contributions – Starting in 2026 employees who make over $145,000 per year (indexed for inflation) will have to make any catch-up contributions to their Roth 401(k). This was supposed to go into effect in 2024 but was pushed back to give plan administrators extra time for implementation.
The limit on total employer-plus-employee contributions for 2025 is $70,000, a $1,000 increase from last year.
Contact the Bedell Frazier Financial Planning team if you would like assistance with your 401(k), 403(b) or 457 plan contributions or the asset allocation of your investment choices. We provide that service for you or your children free as Bedell Frazier clients, even if we don’t manage those accounts.
Individual Retirement Accounts (IRA) contributions remain static in 2025 at $7,000 with the 50 and over catch-up $1,000 for your IRA. The IRA catch-up is now indexed for inflation as part of SECURE Act 2.0 but remains unchanged this calendar year.
SEP IRA contribution levels for 2025 are as much as $70,000 or up to 25 percent of your business earnings, whichever is less.
SIMPLE IRA contribution limit is $16,500 with a catch-up contribution of $3,500 for those 50 and over. For those 60, 61, 62, and 63 the catch-up is increased to $5,250.
3. Roth Conversion
With the expiration of existing tax rates when the Tax Cuts and Jobs Act (TCJA) sunsets at the end of this year and the rising federal budget deficit; higher income tax rates may be on the horizon. A Roth Conversion is a financial planning tool that allows you to take a distribution from your current IRA and roll it over into a Roth account. You pay taxes on that distribution in the current tax year while creating a Roth tax-free bucket for the remainder of your lifetime and your spouse’s lifetime (under current tax law).
Some potential benefits of a Roth:
- Tax Diversification – Just as you diversify your investment portfolio, you should also consider diversifying your tax liability. Many investors have a disproportionate amount of their net worth tied up in tax-deferred accounts such as 401(k) and traditional IRA. Every time you pull from these accounts, it is a taxable event.
- No RMDs – No required minimum distributions during your or your spouse’s lifetime.
- Next Generation Planning – With no RMDs from the account owner or spousal beneficiary, there is more time for assets to grow tax-free. When passed to the next generation, assets are withdrawn tax-free, and the account must be emptied within 10 years. A traditional IRA or 401(k) must also be emptied within 10 years for most non-spousal beneficiaries while generating taxable income with each distribution. Many times, these assets are passed to the next generation while they are in their 50s or 60s, which are peak earning and high-tax years.
4. Gifting in 2025
In 2025 the annual gift exclusion increases $1,000 to $19,000 per donor per recipient. If you are married, you and your spouse can combine your exclusions, giving $38,000 per recipient without triggering the gift tax. At its core, the federal gift tax annual exclusion allows taxpayers to transfer significant amounts of money to their children, grandchildren, and other beneficiaries without incurring any gift taxes.
5. Build Out or Update Your Financial Plan With Bedell Frazier
Working with the Bedell Frazier Financial planning team to design a new or updated financial plan is a great way to start the New Year. We can help quantify the answers to questions: Can you afford the retirement you are dreaming of? Can you take that special vacation? Do you need to continue to work to reach your retirement spending goals? Can you gift money to your kids to help them buy a home? 2025 would be a great time to take advantage of our financial planning offering, which is inclusive as a Bedell Frazier client. If you already have a financial plan, let us refresh it in the New Year. Contact the Bedell Frazier Financial Planning Team today!
Thomas Howard
