Full Retirement Age, Social Security Income, and Social Security Fairness Act.

The Social Security Administration (SSA) has gradually increased the full retirement age (FRA), the age at which individuals become eligible to receive their full, calculated retirement benefits based on their lifetime earnings. As a reminder, the FRA is 66 years and 8 months for individuals born in 1958 and 66 years and 10 months for those born in 1959. Individuals born between May 2, 1958 and February 28, 1959 will reach their FRA in 2025. For those born in 1960 or later, the FRA is 67.

While you can begin receiving Social Security retirement benefits as early as age 62, doing so will result in a permanent reduction in your monthly benefits compared to claiming at FRA. For those reaching 62 in 2025, this reduction could be as high as 30%. Conversely, delaying benefits beyond FRA, up to age 70, will result in a gradual increase in the monthly benefit amount to as much as 24% higher than your FRA amount.

In 2025, those already receiving social security benefits will see an increase to those benefits of 2.5% from the cost-of-living adjustment (COLA). This translates to an average monthly increase of $49 for retirees.

Bigger news coming in 2025 is the anticipated passing of the Social Security Fairness Act. This would repeal two federal policies: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Those policies, put in effect under President Reagan, have reduced Social Security income to nearly 3 million current retirees who receive a public pension that didn’t withhold Social Security tax.  In many cases, this even has impacted those who have paid into social security during their careers but later took a job in the public sector.  Stay tuned.

Roth IRA and Traditional IRA Contributions

There are no changes from 2024 contribution levels to 2025 contributions. That means that they are still maxed at $7000 for the Roth IRA and Traditional IRA pending income restrictions and age restrictions. For those over 50, the maximum contribution is $8000.

Employer Retirement Accounts (401k and 403b) Contributions

Significant changes to workplace retirement account contributions (401(k), 403(b), 457 plans, and Thrift Savings Plans) will occur in 2025. The contribution limit for employees under 50 participating in 401(k), 403(b), and similar plans has increased to $23,500 in 2025, up from $23,000 in 2024. Catch-up contributions remain available for those aged 50-59, allowing them to contribute an additional $7,500. In 2025 under the Secure Act 2.0, employees aged 60-63 will be allowed to contribute an additional $11,250, raising the total contribution limit to $34,750.

Another major change under Secure Act 2.0 impacts organizations that established their employee retirement plan after December 29, 2022. These 401(k) plans will now automatically enroll employees into the plan. The initial employee contribution must be at least 3% of pay but not exceed 10%. This contribution rate will increase by 1% annually until it reaches at least 10% (with a maximum of 15%). However, automatic enrollment is not mandatory participation. Employees retain the flexibility to adjust their contribution rate or opt-out entirely.

Healthcare Savings Account (HSA)

The Health Savings Account (HSA) is a great tax and savings tool if you qualify by being enrolled in a high-deductible health plan (HDHP).  For individuals with a single-coverage HDHP, your contribution increased from $4,150 in 2024 to $4,300 in 2025. If you have a family, you can now contribute $8,550, up from $8,300 in 2024. In both cases, those that are over the age of 55 have a $1,000 catch up contribution.

Flexible Savings Account (FSA)

For the 2025 plan year, employees who choose to participate in a Flexible Spending Account (FSA) can contribute up to $3,300 through pre-tax payroll deductions. Contributions to an FSA can come from both the employee and their employer. If an employee’s spouse has a separate FSA through their employer, they can also contribute up to $3,300 to that plan. This allows couples to potentially contribute up to $6,600 combined towards their healthcare expenses.

Some FSAs allow unused funds to be carried over to the next year. For 2025, the maximum carryover amount is $660, an increase from $640 in 2024. Importantly, this carryover option does not affect the maximum amount you can contribute to your FSA.

Standard Tax Deductions

Most taxpayers claim the standard deduction on their tax returns, rather than itemizing deductions. The Internal Revenue Service (IRS) annually adjusts these standard deduction amounts to account for inflation. For the 2024 tax year (returns due by April 15, 2025), the standard deductions are as follows for those under aged 65:

• Married Filing Jointly: $29,200 (an increase from $27,700)
• Single or Married Filing Separately: $14,600 (an increase from $13,850)
• Head of Household: $21,600 (an increase from $20,500)

Taxpayers aged 65 and older are eligible for a slightly higher standard deduction amount as follows:

• Married Filing Jointly (if one or both spouses are 65+): $32,300 (an increase from $30,700)
• Single or Married Filing Separately: $16,550 (an increase from $15,700)
• Head of Household: $23,850 (an increase from $22,650)

Tax Bracket Stacking and Tax Loss Harvesting

Understanding the federal tax system can aid in more efficient investment strategies that lead to better tax outcomes. Using tax loss harvesting and tax bracket stacking strategies may do just that.

• Tax Loss Harvesting is a strategy that involves selling securities at a loss to offset capital gains tax liability. This strategy is typically used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains. If your losses exceed your gains, up to $3,000 of those losses can be used to reduce your ordinary income. Any losses above $3,000 can be carried forward to the following year and beyond (they don’t expire). So, if you’ve realized gains from your investments, you might be able to offset them with any losses you’ve incurred. Remember, though, that this strategy should be used in alignment with your overall investment strategy, and not just for tax purposes. In addition, it is important to wait at least 30 days before repurchasing any security sold at a loss.
• Tax Bracket Stacking is a method of managing your contributions from different accounts in a way that keeps you in a lower tax bracket. For employees, the contributions you make to your retirement plan, HSA, and FSA can help reduce your taxable income, potentially dropping you into a lower tax bracket. These contributions are made pre-tax, meaning they reduce your taxable income for the year. The table below identifies the tax rate associated with the corresponding income levels.

FRAUD ALERT

As advisors, we are often made aware of situations where older (not necessarily impaired, but just trusting) individuals succumb to extremely sophisticated fraudsters posing as bank employees – possibly even as members of a bank’s fraud team.  They have gotten sophisticated enough to “transfer” calls to other team members and sometimes even provide a call back number that seemingly is the same or very close to a bank’s actual phone number.  Reading these accounts, they seem surreal – but a common thread is the plausibility with which someone can easily be drawn in.

Everyone should have a trusted contact listed on their accounts in case your financial institution becomes concerned about activity.  For those of us with older adults in our lives (and remember, they didn’t grow up with “phishing simulations” and work-sponsored fraud education) take the time to have a conversation about the sophistication of current day fraud.  Stress how very smart people have been victimized and to always pause before responding.  Suggest they call you ANY time that something seems unusual.  Individuals’ retirement savings’ are tantalizing to criminals – treat it like your most precious asset.

Plan Today for a Better 2025

Understanding these key financial updates empowers you to make informed decisions about your savings, investments, and retirement planning. By proactively reviewing and adjusting your financial strategies throughout the year, you can work towards achieving your financial goals and build a strong financial foundation for the future. Crucially, proactive measures are essential to safeguard your assets from sophisticated fraudsters. Be vigilant, be wary of unexpected calls or requests, and always verify information through independent channels. By prioritizing fraud prevention alongside your financial planning, you can ensure your hard-earned wealth remains secure.