Hit the Ground Running in 2025

With 2024 wrapping up and 2025 providing a fresh, clean sheet, here is how those nearing or in retirement can start the New Year strong.

Save More—and Easily!

As we mentioned earlier, several provisions from 2022’s Secure 2.0 Act take effect in 2025 that are worth being aware of. Among the most important, in our view: the big bump in the 401(k) catch-up contribution limit for those turning ages 60 to 63. This is fairly substantial and, as such, may require advance planning.

In addition to the standard $23,500 limit, those aged 50 or older can top off with a $7,500 catch-up contribution. But starting in 2025, there is an added twist: 60- to 63-year-olds get a supersized catch-up: $11,250—potentially allowing them to sock away as much as $34,750 into tax-advantaged retirement accounts. But to do it, you need to notify your plan administrator—and budget accordingly. And the sooner you start, the better: It would ease the impact on your take-home pay to divide the sum across more paychecks.

2025 also brings some other notable retirement plan upgrades:

• Automatic enrollment for all 401(k) or 403(b) plans, with the initial amount set to at least 3% of paychecks, but no more than 10%, and rising one percentage point each year to at least 10% or a maximum of 15%.
• Part-time employees working 500+ hours annually are eligible to participate in their employers’ 401(k) or 403(b) with two years of work experience (down from three).
• While not yet up and running, a federal Retirement Savings Lost and Found database should launch in 2025, letting people search for funds they may have lost track of (e.g., from job changes).

Check Your Withholding

Also look out for your W-2 and check your withholding (W-4). Employers must send workers’ W-2 tax forms by January 31. When you get yours, the tax filing clock starts ticking. You will want to ensure there aren’t any errors and that it matches your records, but beyond that, how much did they withhold for federal income taxes? Ideally, you don’t want to underpay Uncle Sam (incurring penalties) or overpay, since a big refund means you extended the feds an interest-free loan.

To adjust your withholding accordingly, use the IRS’s handy Tax Withholding Estimator to fill out a new W-4 form. To start, have last year’s tax return and some recent paystubs (including your spouse’s, if applicable) ready. You will also want a rough estimate of your medical expenses, mortgage interest payments and charitable giving for the year. Once entered, it calculates your estimated full-year withholding and tax obligation. Then, match the former with the latter on your W-4.

COLA Adjustments

For retirees, adjust your budget to account for Social Security’s cost-of-living adjustment or COLA. 2025’s COLA is 2.5% y/y. This year’s increase is a return to more normal changes, a far smaller bump than 2023’s 8.7% y/y and 2024’s 3.2%—all because the inflation rate slowed. Social Security’s bump hinges on the Consumer Price Index for Urban Wage Earners and Clerical Workers, a different but similar gauge to the headline CPI. Like it, so-called CPI-W ran much cooler in 2024 than the prior two years.

Of course, the general consumption basket the COLA uses to track prices may not reflect your expenses. It probably doesn’t. So it is helpful to check how your monthly expenditures compare. If you find your spending increased more than 2.5% y/y, then it may be worth revisiting your budget. If less though, you might consider expanding them a bit, saving more or paying down debt.

RMDs

If you turn(ed) 73 this year and didn’t take your required minimum distribution (RMD), make sure you do so by April 1! And if you turn 73 next year, start thinking about when and how to take yours.

Lastly, if you inherited an IRA as a non-spouse beneficiary, the 25% penalty for not taking yearly RMDs from it seems set to be reinstated in 2025 after waivers from 2021 to 2024. Importantly, though, the 10-year period you must withdraw funds remains. So if you haven’t been taking RMDs from an inherited IRA the last few years, you may have to accelerate withdrawals to empty it by year 10. If this is your situation, we think it is crucial to speak with a tax or financial professional. Rules have shifted here and continue to do so. You don’t want to get hit by a penalty or complicate your future tax situation unnecessarily.

Those are a few steps you can take now, but in general the more financial planning you can accomplish today helps lower the amount of work you have to do tomorrow. There is never a better time to get started. Happy New Year!