Tax Laws Resulting in Retirement Changes for 2025

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While retirement signals a change in projected taxable income, evolving tax laws can have a significant impact on retirement accounts. Retirement changes in 2024 and 2025 are heavily influenced by expiring tax rates from the 2017 Tax Cuts and Jobs Act (TCJA) and provisions of SECURE Act 2.0 coming into effect. Many new laws are…

Retired couple look at retirement changes to tax laws that will affect their income.

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While retirement signals a change in projected taxable income, evolving tax laws can have a significant impact on retirement accounts. Retirement changes in 2024 and 2025 are heavily influenced by expiring tax rates from the 2017 Tax Cuts and Jobs Act (TCJA) and provisions of SECURE Act 2.0 coming into effect.

Many new laws are designed to help Americans save for retirement throughout their earning years. However, certain changes have an immediate impact on retirees. This post outlines changes to tax laws most likely to impact retirees in 2025.

Close up 55+ woman hand using calculator to calculate home finance.

The SECURE Act 2.0 includes several provisions related to required minimum distributions (RMDs) from IRA and 401(k) accounts. In the past, retirees were required to start taking RMDs at age 72. Starting January 1, 2023, the age was increased to 73, allowing retirees to wait an additional year before taking mandatory withdrawals from retirement accounts.

Beginning in 2023, steep penalties for failing to take an RMD dropped significantly (from 50% to 25%). The provision also allows account owners to reduce penalties to 10% by withdrawing the RMD amount previously not taken. However, you must submit a corrected tax return in a timely manner.

Also, in-plan annuity payments that exceed the participant’s RMD amount can be applied to the year’s RMD. This can decrease the amount of mandatory withdrawals. Starting in 2024, Roth accounts in employer retirement plans became exempt from RMD requirements, further reducing taxes and penalties for retirees.

Key Takeaways:

  • The RMD age increased from 72 to 73 starting January 1, 2023.
  • RMD penalties dropped to 25% in 2023, or 10% if corrected with a timely tax return.
  • Roth accounts in employer plans are RMD-exempt starting in 2024.
A hand stacking gold coins with plants growing out of them.

Catch-up contributions allow people age 50 and older to make additional contributions to 401(k) accounts and IRAs to set aside more earnings for retirement. The SECURE Act 2.0 has added special provisions to increase catch-up contributions for individuals closer to retirement. Starting January 1, 2025, individuals ages 60 through 63 will be able to make catch-up contributions of up to $10,000 annually to a workplace plan. This is a big jump from the previous amount of $7,500 for all individuals 50 and older.

Also, IRAs have a catch-up limit of $1,000 annually. However, starting in 2024, limits are indexed to inflation. That means it could be increased yearly based on federally determined cost-of-living increases. And starting in 2026, individuals who earn more than $145,000 will only be allowed to make catch-up contributions to a Roth account in after-tax dollars. People who earn $145,000 or less will be exempt from the Roth requirement. These changes can help individuals nearing retirement to set aside more funds for financial flexibility to offset the impact of inflation.

Key Takeaways:

  • Starting in 2025, people aged 60-63 can contribute up to $10,000 annually to workplace plans, up from $7,500.
  • IRA catch-up limits of $1,000 will adjust for inflation starting in 2024.
  • In 2026, earners over $145,000 must make catch-up contributions to Roth accounts with after-tax dollars.
A 55+ couple at home working on a laptop computer.

Qualified longevity annuity contracts (QLACs) are deferred income annuities purchased with retirement funds that begin payments on or before age 85. By converting funds in a qualified retirement plan (such as a 401(k), a 403(b), or an IRA to an annuity, retirees can set aside funds that are exempt from RMD rules until the account owner reaches age 85 (or a predetermined date set by the contract). The money set aside will allow retirees to have guaranteed income from the QLAC for the rest of their lives.

Before 2023, these premiums were limited to $145,000. Jan 1, 2023, the premiums increased to $200,000. This provision also eliminates the past requirement that limited premiums to 25% of an individual’s retirement account balance. These new rules allow retirees with income streams from other assets to defer RMDs and related taxes to a later date.

Key Takeaways:

  • QLACs provide guaranteed income by age 85 and are exempt from RMD rules until then.
  • Premium limits rose to $200,000 in 2023 and the 25% account balance cap was removed.
  • Retirees can defer RMDs and taxes with these new rules.
Closeup on the hands of a 55+ person with a computer for accounting, tax audit, or planning budget.

Most taxpayers take the standard annual deduction offered by the IRS instead of itemizing tax returns. Individuals who are 65 or older at the end of the year are entitled to a higher standard deduction. Standard deductions for all taxpayers generally increase annually to reflect inflation. Deductions for seniors are as follows for 2024 (taxes to be filed by April 15, 2025).

  • Married filing jointly: $32,300 (up from $30,700 in 2023)
  • Single or married filing separately: $16,550 (up from $15,700 in 2023)
  • Head of household: $23,850 (up from $22,650 in 2023)

An increase in the standard tax deduction reduces your taxable income, reducing the taxes you need to pay each year. 

A 55+ senior couple with documents for taxes.

While you must reach full retirement age (FRA) to claim 100% of your full retirement benefits, many retirees start collecting a portion of benefits earlier. If you claim Social Security retirement benefits before reaching FRA, your annual income must stay within a certain limit to avoid reduced SSI benefits. Earning limits will increase from $22,320 in 2024 to $23,400 in 2025. If you will reach FRA in 2025, the income threshold is $62,160 (up from $50,250). Once you reach FRA, you’ll get the monthly benefit you qualify for, regardless of work income. 

As many active adults continue to work and earn income after retirement, these increases can help retirees earn income to support their desired lifestyle without reducing SSI benefits. For many, combined income streams are the most effective way to enjoy retirement.

Key Takeaways:

  • Claiming Social Security before full retirement age (FRA) requires staying within income limits to avoid benefit reductions.
  • Income limits will increase in 2025: $23,400 for early retirees and $62,160 for those reaching FRA that year.
  • Once FRA is reached, benefits are unaffected by work income.
A piggy bank, glasses, and a financial advisor.

The 2017 Tax Cuts and Jobs Act rates are scheduled to expire on December 31, 2025. This could potentially increase tax bills on tax-deferred vehicles like IRAs. If you hold substantial assets in a traditional IRA you may want to consider converting some or all of those assets to a Roth IRA. Remember that making this conversion means you’ll pay taxes on the withdrawals now. However, expiring provisions from TCJA mean tax rates have the potential to increase in the future. Roth conversions are irreversible, so it’s essential to discuss the pros and cons with your financial advisor before taking action. 

Key Takeaways:

  • The 2017 Tax Cuts and Jobs Act rates expire on December 31, 2025, possibly raising taxes on traditional IRAs.
  • Converting traditional IRA assets to a Roth IRA now can lock in current tax rates, but taxes are due upon conversion.
  • Roth conversions are irreversible; consult a financial advisor before proceeding.

Retirement isn’t static, and many tax changes can help retirees add to their budget and spend accordingly. Staying educated about changes that occur each year can help you maximize your financial planning to enjoy the retirement you’ve always dreamed of.

Along with saving for retirement, careful planning and finding an affordable location can help you stretch your retirement budget. If you’re seeking the ideal 55+ community to help you realize your retirement dreams, the expert agents at 55places can help. Browse our website, or contact us today to learn more.

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Bill Ness
Bill Ness is the Chief Executive Officer and Founder of 55places.com. His real estate career began in sales for Del Webb before becoming a sales manager for Sun City Huntley. After noticing that the industry lacked a central, reliable, and unbiased resource for active adult communities, Bill left Del Webb in 2007 to start 55places.com. Having traveled to countless 55+ communities and having interviewed residents, builders, and agents around the country, Bill is considered a leading expert on the active adult lifestyle. View all authors

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