2025 Tax Planning Changes: Everything You Need to Know

2025 is here, and so that means that there's going to be some changes to some of the things that we need to know from a tax planning perspective. Today we're going to talk about those changes, but more importantly, we're going to talk about what strategies do we need to be aware of when looking at the numbers that we're going to be looking at that change. And so, as you know, tax planning is very proactive, and so we want to get ahead of this now to start planning now for end of the year 2025, make sure that we get everything done so that we don't leave any money on the table as we plan for our retirement. So my name's Joe Schmitz. I'm the CEO and founder of Peak Retirement Planning. We love doing these YouTube videos. We've done quite a bit of them over the time, and we've got a lot of avid viewers who watch this. We've got a lot of subscribers, and we get a lot of people who reach out to us from these videos looking to work with us. And so just know anytime you watch these videos, you can schedule a time to chat with our team in the link below in the description, and that can just allow us to have a 15-minute call to see if we can help you moving forward and see if we could be a good fit to work together. We're not able to meet with everyone that reaches out to us at this time. We get a lot of people that reach out, but we can probably only take on about five clients per week. And so we want to make sure that we have the capacity to really serve our clients at a high level. But we do have room to continue to add a few more here and there, and so we're always trying to add good fit clients to the mix. So if that's something that this is the type of planning you're looking for and you'd really like to meet with us, then feel free to have that opportunity there. So before we get into all the numbers with the 2025 tax rule changes, let's start about just taxes in general. So as we know, president-elect was a Republican, Congress, House, everything is Republican right now. And so typically that means that those tax policies are probably going to be more likely to be implemented. And as we know, that party is really wanting taxes to be lower. And so if you remember in 2017, something called the Tax Cuts and Jobs Act was enacted, and that was from 2017 to 2026. So we've been planning all along that, hey, in here in two years, we're probably going to have to pay more in taxes. And now it's looking like that's probably going to get extended. So we don't know that for certain, but that's really what's probably going to be the case. The case is that when Trump enacted this in 2017, he's probably going to continue that on. We don't know for how long. Some say it could be eight years. Some say a few years. We're not sure. And that could change at any point. I mean, President Trump, Republican, House, Congress, and office is only in place for four years. And so obviously we know that anything happened beyond that is something to factor in. And so knowing that, we expect the Tax Cuts and Jobs Act to extend is what we would expect. And so that really opens up the door for a lot of people in or near retirement right now to continue on the tax planning that we've been doing over the last few years. So a lot of our clients, we just called them recently and said, hey, we're going to make some changes to the tax plan to make sure that we're basically expecting that the Tax Cuts and Jobs Act to be extended. And so let's make sure we're preparing for that longer time we may have to get some of this tax planning done. And so just be aware, if you haven't done anything yet, it's not the end of the world. You can't change a past, but we can change a future. I would just tell you that you may want to get moving now because some of these opportunities you've had at your fingertips, there is a window and it does close and these may not be as advantageous down the road. So just something to be aware of. We're going to talk through some strategies here today to make sure you do have it on your radar and you're implementing it moving forward. Maybe you've already done all these. And so you can have the peace of mind to know you're in the right spot, you're doing the right things. And I hope this can further educate you to give you that further peace of mind there. So one of the first things we want to talk about with the changes in 2025 is the 2025 Roth IRA changes. And so these are basically a few of the things to be aware of. One is the Roth IRA contribution limit. So that is going to stay the same for 2025. And also to the far right of my screen is a catch up contributions. That's also going to stay the same. So typically that's increases by about a $500 amount each year, every few years. And it's actually a funny tip thing. I don't know if it's actually true. I think it's true. But someone told me before that they only increase it by 500 increments and it's based on inflation. And so if inflation increases and the amount that they should raise that IRA contribution is less than 500, then they won't raise it. It's only after 500. So that's why it's only every two, three years or so that they actually make that increase in the amount you can contribute. So fun fact of the day with this video here. And then the two columns in the middle there are what we want to pay attention to next. And those are the income limits for contributing to a Roth IRA. So we have a lot of clients that we work with where maybe they're working and they make over that amount, or maybe they're retired even, and they have a pension and they're working still. They may be over these income limits. And if so, they can't contribute to a Roth IRA. And so that's what that stats for. Understand there's a phase out period around that number that we're showing there on the screen. So just make sure you're doing your due diligence on what that actually looks like and how to do your planning around that. But what we do for clients, if they are over these income limits is something like a backdoor Roth IRA. And so a backdoor Roth IRA is a legal planning strategy that you can implement. And basically the idea is, is you contribute to an IRA, but understand when you contribute to an IRA, there's also limits on the deductibility of that too. So most people, if you're making that income, you can't deduct that IRA contribution. And so you're basically just putting your money in after tax. And since you've already paid your taxes, it's now in an IRA, you would then take that IRA and move it to a Roth IRA, that's called a backdoor conversion. And so you're probably thinking, well, how does that work? Why don't I just fund the Roth IRA? Well, remember you can't contribute to a Roth IRA if your income is too high, but what we're talking about here is a conversion. We're converting from the IRA to the Roth. And if you know with a conversion, there is no limits, there's no income limits, there's no amount limits. I joke here being in Columbus, Ohio, even if you like Michigan, you can still do it. The government doesn't hold that against you, but that's how that works with a backdoor Roth IRA. Now understand if you already have a large amount in an IRA, then you may face something called the cream in the coffee is what I call it, where it may not be that clean to just do that. But if you have no IRA dollars, maybe all your money's in a 401k, it makes that Roth conversion really easy and simple. And there's not anything that you're going to have to calculate. If you have already done this in the past, make sure you have something on file called an 8606 if you've ever contributed to an IRA and not been able to deduct it. A lot of people have done that in the past because their income has been higher, but they haven't recorded it. So just make sure that's a consideration that you have there when looking at this type of advanced strategy. And also understand with a Roth IRA to be able to contribute, you also have to have earned income. So a lot of our clients are retired, they don't have any earned income, so they can't contribute. Although we could do the conversion that we've been talking about. So nearly all of our conversions, we work with a diligent saver, we call him the Midwestern millionaire. I'm actually writing a book about this, it'll be out soon. And it's about those people who have saved at least a million dollars. A lot of them have saved it in tax deferred vehicles, a lot of them have pensions, a lot of them have higher incomes that they're going to expect in retirement. And because of that, well, they're going to be in higher income brackets. And so a lot of the tax planning we talk about can be advantageous for them. And so since they can't contribute to the Roth, but they still want that tax free opportunity down the road, the conversion would be the way to go. The next change I want to talk about is for those who are still working. So a lot of our clients, they're in between the ages of about 55 to 70, which means about half that crowd is probably still working. We have a lot of clients that do retire early, but for them, they're going to be still contributing to their 401k. And a lot of our clients, they're diligent savers, they're very frugal, that Midwestern value concept. And so they are typically maxing out their 401k. So the good news for them is that is going to increase by $500, as you can see in the far right or far left. And then the catch up for those that are 50 or older is going to stay the same. So you have the opportunity to do about $31,000 total into your 401k if you're over age 50. And remember, most 401ks allow a Roth option now. So as we talked about the Roth, the advantages of the Roth last time, that could be an opportunity for you to get more money socked away tax free, take some of the money maybe you have in a brokerage account, or maybe you have a lot of money saved in the bank account, we'll just maximize the amount you take from your 401k. Yes, that will come out of your payroll, but basically try to reposition this money over to the tax free side is something that we always tell people, right? Most people, when we talk to them, when they first come and see us, they have all their money in tax deferred. There's a stat out there, I think it's like $30 trillion are in tax deferred, and there's less than about $1 trillion in tax free. So again, we're typically trying to see our clients try to shift that a little more. We don't want everything in tax free, just like we wouldn't want everything in tax deferred like it is now, but we want more of a balance. So this is a way they can start to fill that balance and start to get it better. Like we talked about, Roth conversion is another strategy, Roth contribution, so you could do a Roth 401k, a Roth IRA contribution if you're eligible for that, and then a Roth conversion as well as ways to start to shift that scale there. But again, we don't want to do everything at once, that would cause big issues, or we may not want to do everything all together as time goes as well. Then the last thing I want to talk about here is this FAR right here. As you'll see, it's new in 2025, it's a really unique opportunity, and I know you're not supposed to say the ages of people, but my mom just had her 60th birthday party, and for her, this is a great opportunity for her. She actually works with us here at Peak Retirement, and so for her, we max out her 401k. She makes great money with us, she does great work, she's always done great work, and so we want to make sure she can maximize that 401k so that she can maximize her retirement savings, because she is that Midwestern millionaire we always talk about. For this opportunity, we talked about they can already put in $31,000, well now they can put in additional money on top of that if they're between the ages of 60 and 63, and so if you find yourself in that area, you now can contribute more, so average age of our clients are right around that 60 to 63, and so this is a huge opportunity if our clients are working that we've been educating them all about, and making sure that when January 1st came around, we started to make sure that they were implementing this and putting this into play, so just another great opportunity that exists there. You just have to contact your 401k provider and make sure that they increase the amount of payroll deduction that you're putting in, and ensure that it goes to the Roth if that's what you would like, if that's what's going to be in your best interest. That may not be the best interest for you, but just make sure you look at that, pros and cons of each, but again, most of our clients are definitely doing the Roth right now with lower tax rates, and them having more saved up and expecting tax rates to go up higher in the future is why that can make sense. The next one we'll talk about here is the 2025 IRMA tiers, and also the changes in premiums and everything for that, so as we know with IRMA, that's Medicare premium, so this is something a lot of our clients are worried about, so let me just talk about what IRMA is and how it works. When you go to claim Medicare at 65, it goes back two years to look at your income, and that's going to dictate the price you have to pay at 65, so let's say at age 63 you sold your business and you had a million dollars of income, well in that case, you would find yourself in the fifth tier on the screen here, and you'd have to pay the most amount of money for Medicare, you'd have to pay $6,000 surcharge on top of what you're paying there, and that would be for you and also your spouse if you are married in that instance, and so they go back two years, so you have to be aware of that. Now there is a one-time exception in that situation where they could file an exemption and probably not have to pay the surcharges, and we have a 100% success rate with that so far, so hopefully I can continue to say that in each video we do moving forward, but every time we've submitted that for a client, it's got approved, so not saying they're ultra-liberal with that, I'm just saying that every time if you have a valid reason for it and you explain it the right way, they're probably going to give you that exemption on that, so it's just something to make sure you're looking into and at least try, I mean the worst thing they can say is no. This is basically not saying that you're going to get better healthcare coverage is the unfortunate thing, and so yes, you're going to have to pay more for healthcare, but you get the same coverage as everyone else, so I don't think that's fair. I wrote another book called I Hate Taxes, I don't think the government's the best steward of all of our taxpaying dollars, I'll pay my fair share, I'm not against it, some of the things that my dollars are used for, I think that's good, but I don't want to have to pay more than I have to, I don't want to have to tip Uncle Sam just because I don't know what the tax rules say, just because I don't know how the game works, but if you know how the game works, it's all legal to find tax saving strategies out there, right? The tax code is about this high, there's more words in there than is viable, we have a whole stack of them in our lobby here at our office, and you just have to know what's in there. You have to hire a team, find a team that can help you, make sure you can implement those tax saving strategies the correct way, and when implemented correctly, for a lot of the clients we work with, I mean it's not outside their own possibility to see them save hundreds of thousands of dollars throughout their retirement just by enacting the right strategy. So that's why we do this channel, that's why we are in business here, and one of our foundations is helping our clients save money on taxes, we do everything from a tax planning perspective, and I think that's ultra important because the biggest expense in retirement for most of our clients who are diligent savers is taxes, and so you want to make sure you're planning for that. So these got adjusted, it was just about by 5% as all these numbers got adjusted here from the previous year, and so you can tell here what that looks like. So the first Medicare tier is $212,000, so a lot of people may be under that, but again the diligent saver, maybe you have $2 million in your IRA, and you take out your RMD about 4% from that, that's about $80,000 you're taking out from there if you have a pension on top of that, if you have Social Security on top of that, it's not outside their own possibility to get to $212,000 pretty quickly. And if you're 60 years old with $2 million, well by the time that grows, by the time you're 65, or by the time you're 73 when you're forced to take out money at required minimum distribution, well I guess it would be 75 in that case if you're 60, so 73 or 75, it's probably going to grow even more, which is going to fortune these tiers maybe not at 65, but maybe it's at 75, right? And so you just have to understand how all this plays together. So when we look at planning for clients, we would consider things like Roth conversion that we talked about earlier, just use that as an example. Well maybe we blitz the Medicare premium tiers for one year, or maybe two years or three years or however many times it makes sense to do it for them, so that we never have to worry about a Medicare premium tier increase again in the future. Now we're speculating here, there may be times in the future where they could still pay Medicare because maybe the rules change, right? Maybe they reduce these tiers or they make people pay more, we don't know what the rules say, right? Tax code's written in pencil, but let's just play along with me of what we expect. And so it's like, do we want to pay it more in one year? So maybe we find ourselves in a third tier that we do have to pay more in Medicare for one year, but then we never have to do it again. For example, if we did a conversion, now if we have more money in a Roth, well when we get to retirement and we take out money from our investments, we won't have to pay tax if it comes from a Roth, well now that means our income will be lower, which means we won't have to pay as much in taxes in those years. And so you can see how this works, and so just be aware if you are doing Roth conversions to pay attention to this. Basically what I'm telling you is it's okay to pay these tiers, it's just make sure you're not overpaying, right? So some of our clients when we're doing those Roth conversions, we won't pay any Medicare tier increases because it won't make sense. Other clients we have that their tax deferred dollars are in the multi-millions, well we may have no chance but to blitz those because they're always going to find themselves in higher Medicare tiers in the future and we want to get ahead of that and do so now when tax rates are lower than what we're expecting in the future. So those are some things to be aware of there. We typically find most of our clients play around in that 1, 2, 3, 4 tiers, we don't see too many people get to that fifth tier obviously because they're so high, but just be aware of those four tiers is what we're typically trying to advise people of. The next one is just a simple tax, 2025 tax rates with inflation. So we've already talked about what we expect to happen with Tax Cuts and Jobs Act, which this would have been in place in 2025 regardless of what happens there. So our hope is obviously that this is going to continue in 2026 and beyond, what you're seeing here on the screen with slight adjustments. But no big changes here from last year, it's just increases in the numbers here. So if you look at the chart here, basically the 10% bracket obviously goes from zero to about $23,000 if you're married and then if you're 22% it would start at $94,000 so you'd be in the 12% bracket from $23,000 to $94,000 so that saw an increase by almost 5% there. And so you can see that throughout the time. So we're talking about Roth conversions, so let's just stay on that topic, I think it's good education. So when we do Roth conversions with clients, you've got to look at tax rates. There's so much more to that, so I don't want to put too much emphasis to this, but it will help you kind of get an idea of what it looked like when you do Roth conversions. So one thing you always want to look at is your tax brackets like we're talking about here. But the reason why I think that's not the only thing you want to worry about because if you find yourself in the 12% bracket, that's great, that's a low bracket, but if you're taking Social Security, you're also going to force yourself to pay more in Social Security tax. So although you may think I'm only paying 12% to Roth convert, well you actually may be paying more than that because you're forcing your Social Security to now become taxable and we call that the Social Security tax torpedo. And so you just want to be aware of how everything plays together. So I want to just caution you of making decisions on how much to convert on this, but this will just give you an idea of how to think through Roth conversions because you also have to worry about Medicare tiers, credit deductions, AMT, NIT, there's all these things that play together that you want to make sure you're accounting for. So we have software that we've built for our clients to ensure that all of those things are accounted for so that when we make a decision of how much to convert, we feel comfortable with it. We feel confident that's going to be the right amount for the clients we work with. And so for example though, let's say that none of that other stuff existed, maybe it makes sense for us to do a Roth conversion up to $94,000 because all of that would technically be in the 10%, 12% bracket, which are low brackets, right? And then for a lot of our clients, we're typically looking near the top of the 24% bracket because that goes up to $383,000. So some people say, well, I shouldn't do a Roth conversion because I'm still working. Well, I mean, are you making more than $383,000 plus the standard deduction, which is $30,000, which we'll talk about next? Are you really making more than $413,000? Because most people are only making about $100,000 to $200,000. And so if you're making $200,000, I could argue that you could probably still do a $200,000 Roth conversion on top of that because it's only at the 24% bracket. And I expect 24% to be relatively low over your retirement probably if tax rates go up, right? I mean, if Tax Cuts and Jobs Act gets expired, if it sunsets, well then the 24% bracket is going to turn into the 28% bracket. The 22% is going to turn into 25%. So just right there, you'd be paying more in taxes. And so I think people need to understand how the historical tax rates have looked, right? Our highest bracket right now is 37%. Historically, the highest bracket's been 94%. It was about 70% in 81. And so we got to understand that historically, here's what tax rates have done. Where do you think we're going considering we're $37 trillion in debt? We have a Social Security that's out of liability, a Medicare that's out of liability, and how we're going to make this work, right? We're either going to need to reduce spending or increase revenue. And so government can do 100 different things to make that work, but obviously taxes is one that they obviously look at closely. They just raise taxes, that brings in more revenue. So just things to think about as we're planning out for the future. Then the last slide I want to talk about today is just the standard reduction. So this one's a fun one. So it's one of my favorite things about the tax code is the standard reduction. So the first $30,000 if you're married that you receive is tax-free. So if you're married, it's about half of that, and obviously head of household, which doesn't happen very often. But if you're married, it's $30,000. So for example, let's say that you have $30,000 that you want to take out of your IRA, and you're not working, you have no pension, you have no Social Security, you just say, I want to take out $30,000 from my IRA. If you do that, and that's it, you pay no taxes. If you're working, you're making $100,000, that first $30,000 of income you earn, you don't pay any taxes. So that's how the standard deduction works. It's very high right now. As we've talked about Tax Cuts and Jobs Act, that could go down significantly if that sunsets as we've talked. But right now, it's generous. And so that's why you're also seeing people right now, they're not giving as much to charities because they're not getting any benefit. 90% of people take the standard deduction, less than 10% of people itemize their deductions. And so that's what we're looking at here with the standard deduction. So we always want to make sure people are aware of this in retirement, because if you have no income in retirement, say maybe you don't have a pension, maybe you're taking Social Security, and maybe you're just taking out money from a Roth investment or whatever. Understand that you want to make sure you at least take out enough from your tax deferred investments to cover this standard deduction, so you're not leaving any of the 0% tax bracket, we call it, on the table. So we run a calculation for that. For a lot of our clients, they can take out about $15,000, $20,000 a year in retirement, tax-free if they don't have a pension. Now if you have a pension, you're automatically going to blitz through this standard deduction, which pensions are a great thing, so let's not look down upon them, but just understand that with your planning as you move forward. And when we're doing our tax planning now, again, talk about Roth conversions, when we're doing Roth conversions now, we have to project out of what we expect things to look like in the future. And so for a lot of our clients, we like to factor this standard deduction into that equation, and we look to try to get their RMD low enough so that it can either be mostly in that standard deduction, or all of it in that standard deduction pinned on their situation, so that they can what we call live a tax-free retirement. And we're able to help some of our clients get to this position that don't have pensions, because if you take out $20,000 from tax-deferred, that's $500,000. And so if we do enough Roth conversion to get their tax-deferred number down to about that amount, if they just take out their requirement of distribution from their RMD, which would be about $20,000 off of $500,000, they could find themselves in that position. So just some fun math there, some fun thinking, but that's what you need to look at. So hopefully today's video was helpful. If you could do me a favor, in the comments below, I'd love to hear what other videos do you want to hear in 2025? What other topics, what other questions do you all have? And I'm going to look at those comments, and I'm going to add them to my list of things to do videos on, to make sure that we can make this content as tailored to those who are watching this as possible. And go ahead and subscribe if you want to get reminders of all these videos moving forward. So with that being said, Happy New Year, have a great 2025, and we'll see you on the next one.