Changes Coming in 2025 to the Retirement Planning Landscape

One of the highest priority areas of financial planning is creating retirement security. The definition of retirement means different things to people, especially compared to past generations; however, most people still look forward to the day when they no longer feel like they have to work to afford their lifestyle. As a result of this emphasis and the changes that have occurred in the last 40+ years during which traditional pensions have become few and far between, it is critically important that people take ownership of and make adequate plans to be financially prepared for retirement. For those who are building towards that goal, one of the major components is establishing enough personal savings such that they can draw from those savings over their remaining years to supplement other sources of income, which often involves saving in an employer or personal retirement plan. On almost an annual basis, the contribution limits on those plans tend to increase with what amounts to cost of living adjustments. However, there is a more significant change coming in 2025 with respect to retirement plan contributions. There are also pending changes regarding Social Security benefits for 2025. In this issue of the newsletter, we will explain what these changes are, who they impact, and how they may affect retirement readiness.

Enhanced Catch-Up Contributions for Retirement Plan Investments
Whether you contribute to an employer retirement plan or your own personal retirement plan through an Individual Retirement Account (IRA), your contributions provide the fuel to build your base of savings that will be used in retirement. Of course, the reason for putting that money at risk by investing it is to get the money working harder for you so it grows the asset base beyond just what you put into it. The higher your asset base grows to, the more of a role the return on investment plays in establishing your retirement readiness, but make no mistake, your contributions are always an important part of improving your retirement readiness. Because of the tax advantages associated with retirement plans, each type of plan has restrictions, including on how much you can contribute in a year, and the limits are higher for employer plans vs. IRAs. For example, the annual contribution limit in 2024 for most employer retirement plans (think 401k) is $23,000, whereas for IRAs the annual contribution limit is $7,000. By comparison, the limits in 2025 for most employer retirement plans will increase to $23,500, but the IRA limit stays the same. The above limits apply to investors below age 50, but because there is recognition that the closer you get to retirement, it is more critical to put as much money away as possible, there have always been catch-up contributions allowed for retirement plans for individuals age 50 and above. In 2024 the annual catch-up contribution amount allowed for most employer plans is $7,500 (total contribution allowed of $30,500), and the amount for IRAs is another $1,000 (total contribution allowed of $8,000). For those contributing to IRAs, there is no change planned in 2025. However, for those contributing to most employer plans, the catch-up contributions for investors age 50-59 will remain the same, but one of the big changes for 2025 is that there will be a higher catch-up contribution limit for individuals age 60-63 of $11,250 (allowing a total contribution of $34,750). Granted, not everyone is able to contribute at these levels to their retirement plan, but if you have the capacity and want to sock away more during your latter working years, this provision could make a real difference.

Social Security Reform on the Horizon 
The vast majority of workers in the U.S. pay into the Social Security system through payroll deductions, and once eligible for benefits, they are able to use the retirement benefit of the Social Security system as a core source of income in retirement that provides cost of living adjustments to help fight off the effects of inflation. Several years ago, reforms were made to Social Security with the intent of strengthening its stability. As of this writing, there is legislation currently on the table that has been passed in the House of Representatives and is awaiting a vote from the Senate, called the Social Security Fairness Act, that would eliminate two provisions that primarily affect people who work or worked in government or other public service positions that do not make payroll deductions into Social Security. The two provisions are the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP applies to people who worked most of their careers in employment that did not contribute to Social Security but worked long enough in Social Security covered employment to be eligible for benefits. These workers who don’t contribute to Social Security typically have a substantial amount of their paycheck withheld to fund a traditional pension once they retire. Without going into all of the details of it, the WEP applies a reduction to the calculated Social Security retirement benefit by lowering the percentage of one part of the benefit calculation from 90% to as low as 40% if you worked 20 years or less in a covered job. Chances are that if you worked limited years in Social Security covered employment, this reduction will have a larger impact on the calculated benefit. The GPO also applies to mostly the same group of people, but it impacts those who are surviving beneficiaries of Social Security retirement benefit recipients. Because the survivor in this case probably receives a fairly substantial pension rather than Social Security being their core source of retirement income, the GPO lessens the amount they will receive of their late spouse’s Social Security retirement, so instead of them receiving the full amount of their spouse’s benefit, it is reduced by two thirds of the amount of their pension benefit. If the Social Security Fairness Act is passed and signed into law in its current form, both of these provisions will be eliminated, thus providing former employees who did not primarily work in Social Security covered employment access to a larger amount of retirement income.

Each of these changes could have sizeable ramifications if they apply to you, but as with so many such matters, it helps to apply it to your particular situation. If these provisions may affect you, and you want to assess the impact for yourself, we are available to help you make those determinations.

Stewardship Emphasis

If you’ve made plans to climb a mountain, knowing how much energy you have to expend, it’s a welcome surprise to have a help line dropped down that can lessen the amount of energy you have to use to get to the top.

The Empowerment Channel    |   Volume CCXXXII   |    Dedicated to Promoting Financial Education through Stewardship