Episode 508 – Planning Wrap-up for 2025 and a Look Ahead to the New Year

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John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you. And as we approach the end of the year here, I thought it would be really helpful to kind of just do some friendly reminders and housekeeping and thoughts and ideas of what you may have the opportunity to execute on and do. Both before the calendar year turns and as you think about some strategic planning when it comes to retirement and contributions and some tax savings and some charitable ideas. Because once that year flips over, everything resets and we start over. So thinking now as you close the calendar year, what opportunities may still exist and doing some future planning for what you may be able to take advantage of in 2026. And to help me have that really important conversation is my good friend and colleague here at Mercer Advisors, CERTIFIED FINANCIAL PLANNER® and market leader, Mr. Jason O’Meara. Jason, Thanks for joining me, my friend.

Jason O’Meara
Yeah, man, thanks for having me back. This is a, this is that time of year, right, where we need to, you know, finish all the housekeeping for 2025.

John Walker:
Absolutely tis the season, and when we meet with families, particularly ones that are considering maybe working with our Mercer Advisors team, you know, we often get asked, Jason, like what, what does a year look like, right? And, and we often map out for them like as you come on board and once we’ve gotten the heavy lifting done, right, of establishing the new plan and coming up with an investment approach and You know, taking care of whatever those immediate needs are, the pain points that we’re solving for immediately, we typically fall into a pretty regular cadence of 3 to 4 meetings scheduled a year, right?

Kind of like the dentist, you know, they’re coming and thematically, the year kind of starts to take a little bit of, you know, a consistent shape and the beginning of the year is often thinking ahead towards, all right, what are our cash flow needs going to look like? What are the things that are going to be specific to this year that we need to address in the plan. The middle of the year meeting is typically a checkpoint. Hey, are we on track for all of these things? And the end of the year meeting or meetings is a lot of the execution we’re going to talk about today. This is when we are doing things like, hey, it’s the end of the year. If we were going to do things like Roth conversions, we’re often doing them now. Right, if you have required minimum distributions, we’re doing them now, unless we’re doing them on a monthly basis, right, or a quarterly basis.

Jason O’Meara
This doesn’t fit everybody, but the idea of this of this, this time of year is we want to make sure that we’re done, right?

John Walker
Right. Everything we set out to do in your plan for this year, exactly. We have to execute and also, It’s checking in to see, like, hey, let’s start thinking about next year when it comes to are there things we can do before the calendar flips to set you up for more success next year. And so let’s talk a little bit about what you need to get done before the end of the year, and then we can talk about what 2026 might bring because there are some changes that people should be aware of. The IRS has some new rules and limits and things like that that we thought it would be really helpful to share. So let’s Let’s start with before 2025 ends here, Jason.

You know, we talked about, you know, this is where you start concluding your execution of things. So if you were considering Roth conversions or if you’re working with your advisory team to do that and haven’t done it yet, you should by now hopefully have a reasonable sense of what your income is going to look like, right, outside of maybe some. You know, bonuses or things that maybe might be unique for this year, but generally by this time of year, you have a pretty good sense and can estimate what your income is. So we often suggest, or we’re actually usually doing the calculus right now of this is when we can really, if we haven’t already done it, now is the time to make sure that. execute.

Jason O’Meara
Exactly, because ultimately, listen, we always say we don’t want to, we don’t want to cause harm with, with our recommendations, right? So what we don’t want to do usually, and this is again, we are talking broad strokes here, um, everyone’s different, so you, you, you, the listener, your plan may be different than the other than somebody else’s, right?

But Usually, we wait, like John mentioned, towards the end of the year to do these Roth conversions, cause when you convert from a traditional IRA or traditional retirement account to a Roth IRA or Roth retirement account. You pay tax on that, right? That’s ordinary income, right? So we want to make sure we know what tax bracket you’re in. We want to make sure we’re not causing additional taxes, right? We want to make sure that we’re not adjusting your Medicare premiums two years from now because of the Roth conversion we do today.

So there’s, there’s various items that we need to look at and just be confident, be very confident that we are not causing any harm with our recommendation, right? That’s right. So, that’s right. So ultimately it involves tax projections. It involves planning, uh, but at the end of the day this is usually the time of year where all of that takes place.

John Walker
And I love how you say that, Jason, because it’s so, so one of the things that we share, particularly with new families when they come on board, is that we think philosophically a little bit different about tax here at Mercer Advisors. And so you say do no harm, but I would underscore that by saying making sure you know the trade-offs and consequences of whatever we’re doing, because there are families that elect sometimes to. pay more tax than they are required to do with things like Roth conversions because of the potential upside that they see, because they have a different purpose, right? And so it’s just about understanding what is going to happen, making decisions with actual empirical data, making decisions with all the information available so that you can.

Make the most informed decision. And, and that really kind of is our, our North Star, right? That’s how we guide families, particularly around the tax conversation. There’s some other things that you can do before the end of the calendar year that I think it’ll be just important to, we’ve probably shared in the past, but probably restate and remind folks of. We have a lot of folks that we work with that are charitably inclined, and there are some changes coming to the limits around charitable contributions. So, um, for this. Tax year in 2025, it’s your last chance to maximize your charitable tax deductions before the new 2026 limitations.

So if we always say the tax tail shouldn’t wag the dog, if you are still planning to give because of the emotional fulfillment, the sense of purpose. You do still have the ability to reduce your taxable income in a way this year that is going to be different in 2026. So if, if you plan To do so is important to execute and we might as well share a little bit what’s going to be different for next year.

Jason O’Meara
There’s a new 0.5% AGI floor. So starting in 2026, only charitable contributions that exceed 0.5%, so 0.5% of AGI will be deducted for itemizers. So smaller donations going to no longer count unless bunched into a single year. So in other words, If you’re going to be donating, and it’s not going to reach that limit, that 0.5% limit, uh, it won’t be deductible. So maybe it makes sense to pull some of that, cause that stuff that, that doesn’t exist today. So maybe it makes sense to pull some of those deductions into 2025, you know, so maybe we, maybe we ramp up those deductions, right? Um, ultimately, as, as Jonathan mentioned, you know, when we’re looking at 2025 deductions here, there’s a purpose.

So maybe, maybe you’re not gonna have as high of income next year or your income is gonna be considerably higher next year. You know, um, we wanna make sure that we’re planning appropriately for this year. Uh, one thing that most people forget, if you invest in mutual funds inside of a taxable account, they usually have capital gain distributions around this time of year. So you should know what those look like. And we can, if, you know, uh, one strategy we do is sometimes if people are looking to donate, uh, stock to a charity, we try to get that donation out before the gains distribution. So we eliminate those, those taxes from occurring.

So ultimately there there’s a lot of different plans, but each person is different, right? So it all factors in on what your particular goal is, as John mentioned, I always tell people, don’t, don’t donate for the sake of, you know, for taxes, donate because there’s a charitable intent. But sometimes it does make sense if you’re going to donate to donate appropriately, and by appropriately I mean with the right vehicle. Cash isn’t always the best way to donate.

John Walker
So, absolutely right. One of the things that remains in the new tax law is that you still are able to donate appreciated securities or as, as a gifting strategy, right, instead of just using cash, as you said, that has, that does remain and it remains highly advantageous for folks that are donating, right? So, um, Consider, as you said, the funding source for, for where you go with, with your donations. The other thing, just be cognizant of this new limit that’s going to come into place and talk to your accountant about it, around how it may particularly impact you with these AGI limits, but we have a lot of families that we’re working with that are getting ahead of this by doing some bunching strategies or maximizing their. Charitable deductions in this, you know, 2025 calendar year.

The other thing that remains that might be an effective strategy for you is doing things like bunching or using something like a donor advised fund that allows you to make a large gift in one year and then grant those funds out to those charities later, right? So thinking through things like that. The other thing that remains unchanged under the new, you know, tax bill is that QCDs, qualified charitable distributions do remain in the new tax code. So, if you…

Jason O’Meara
And this is a big one that some people that that people don’t realize that the true value, right? If you’re over 70.5 years old and you’re making donations to anything. It should come out of your IRA.

John Walker
If, if you’re an IRA owner, you should really consider using that as an opportunity to fund, right? Yeah, in…

Jason O’Meara
…2025, you can do $108,000 right? And here’s the benefit of it. If you’re subject to required minimum distributions, these satisfy your required minimum distributions, dollar for dollar. So if you have a $108,000 required minimum distribution, you don’t want or need to take that money, you can donate $108,000 and it’s tax neutral. You don’t pay income tax on on the required amount of distribution that you otherwise would be taxed on. You’d be paying tax for money you don’t need. So there’s there’s opportunity here. But as you said, as we said, John Doe, right, the charity should be the goal. If you’re donating anything in years in which you have required mental distribution, your IRA should be the first place you should consider taking the money from.

John Walker
Just consider it. Talk to your tax professional, and I will remiss if I don’t share that the QCD limits, the qualified charitable distribution limits for 2026, are actually increasing. To $115,000 per taxpayer. So again, for eligible eligibility for that, if you’re an IRA owner that’s aged 70.5 or older, you can donate directly from your IRA, and it satisfies your a portion or somewhat of your RMD up to those limits, right? And so talk to your tax professional, work with your team, but if you are so charitably inclined, For 2025 and going forward with the increased limits for 2026, that could be a really, really viable option.

And Jason, I think the last thing I’d share just for 2025 is if you are not yet of retirement age and you’re still working, you should really be looking at What you have contributed to potential retirement plans and what you are able to do potentially before the end of the year. And I would include even beyond retirement plans, but things like 401(k)s, IRAs, HSA plans, you know, depending what vehicles you are using to fund any of your savings, this is a great time of year. To take a look at what is there, have you reached limits? Do you have the capacity to, to contribute more? If you do, what would you look like and how would that, what would that look like and how would you execute on it, right? These are the types of things that once that calendar year flips, right, you have no longer have the option to do these things. So, particularly, Employer retirement plans, right?

So, so how do we look at this and say, all right, am I on track towards my objectives for this year? Am I on target towards my savings goals? What opportunities do I have before the end of the year? Let’s just remind everybody what 2025. Limits look like and then we can, we’ll turn the page ourselves and start thinking about, you know, the increases for 2026 and what that might mean for families.

Jason O’Meara
Yeah, absolutely, because again, this is that time of year, right, where we’re mentioning all these other areas that we want to, you know, check off the list. You know, John, I was always telling families I work with that This time of year is like a punch list, you know, if you, if you’re, you’re building a house, the, the contractor always has this punch list of things that need to be addressed or make sure that are fixed or make sure that are right. This is how I, I approach this time of year. So one of the things I’m looking through is have we maxed out our contributions to our available retirement plans, right? So if you have a 401(k), 403(b), 457, you know, elected, basically a retirement plan at work, did you put in the $23,500 if you’re under 50? If you’re over 50 years old, you can add an additional $7,500 to your 401(k). So, have we maxed out? Have we made sure we, we reached those numbers?

Because if not, then maybe that should be a place that there’s extra money, that’s where that should go. If you, you know, have a traditional or Roth IRA, did you put in your $7,000 this year? And if you’re over $500 it’s $8,000. Did you make those contributions? Should we, or, or is this an area we can add to, right? Whereas a 401(k), you have to do it by the end of the calendar year. Uh, the IRAs you do have until April of next year to make your contributions for 2025. So it’s something that we can, that you can, you can be a little flexible with, right? But we should at least be planning appropriately.

And if you have a high deductible health insurance plan, do you have your HSA, your health savings account, and if so, have you matched, have you maxed that out because that is another tax deductible contribution, right? So if you’re single, you could do $4,300 in 2025, and if you are a family, you can do $8,550. You know, so there’s, there’s things that we want to make sure that we are, we are maxing out and that we are effectively, you know, kind of getting as much money into these plans as possible.

John Walker
So Jason, as people start thinking about 2026 and if they’re still going to be contributing to these plans, It would be helpful probably to make them aware that the new bill has some changes, right, to the rules and the contribution limits have changed a little bit. What we really want to make sure is there are some actual changes to the quote unquote catchup contributions, right? So. Beginning in 2026, we have some projected, they’re not completely finalized, but it does look like the limits for things like 401(k)s, 403(b)s, the elective deferrals are going to increase for IRAs, for SEPs. So let’s just briefly walk through them, and then I think we could spend a little, little time talking about how the catchup contribution is going to change, right?

Jason O’Meara
Yeah, so your, your 401(k). Um, essentially is going up by about $1,000 next year, right? So if 2025 was $23,500 everybody can now contribute $24,500 assuming you made $24,500 right, for your 401(k), 403(b), 457 plans. Now here’s where some things have changed, right, when we talk about that catchup, that catchup provision. So when you turn 50, the catchup provision is now $8,000 additional. So $24,500 plus $8,000 is now what you can contribute.

But if you’re in this magical age between 60 and 63, now there’s some math associated with this and it’s based on earnings, but we’re just going to say most people can contribute instead of $8000 you can actually contribute $12,000. To the 401(k) as a catch-up. So the catch-ups now have, have like a stepped up um ability once you hit 60 to be able to defer even more. And that’s just, that’s big cause most people, you know, that’s your highest earning years, right? Late 50s, early 60s before retirement’s usually when you’re at your peak earnings. So you’re able to kind of push more into these uh retirement vehicles.

John Walker
Yeah, and there’s some changes too, right? If your wages exceed a threshold that’s projected to be around $150,000 you have to make your catchup contributions as Roth rather than pre-tax, right?

Jason O’Meara
So that’s a big one, right? That’s, that’s huge. In 2025, those catchup contributions, if you’re doing into a traditional 401(k), say. And that that’s $7,000 extra that you’re putting in, that’s tax deductible. If you make more than $150,000 a year in 2026, that $8,000 worth of ketchup is going to go into a Roth, and that will not be tax deductible in in this year, right now. There are some benefits, uh, when you pull the money out, it won’t be taxed out of the Roth side of it, right? So there’s some benefit in the future, but if you’re looking at this to manage taxes today, you’re not going to see as much tax deduction. Because of this change…

John Walker
…and that’s a really big shift, right? And so the bill delayed this to 2026 to give employers and plan sponsors and administrators enough time to sort of update everything. You should also note that if your employer plan does not currently offer Roth contributions, And you exceed that IRS limit of what we project to be $150,000 in Social Security tax income, you may not be able to make any catchup contributions.

So because it has to go into this type of vehicle. So as we think of things to be prepared for for 2026, if you fit those criteria of being in that age and if you are able to make catch-ups, And you are exceeding those income limits, you may want to take some time now to talk to your plan and, and your, you know, HR or whomever to find out what your options may be because, um, you, you know, if that’s something that’s important to you, your plan now has to have these certain things in place for you to be eligible. So that’s a big heads up, right, because that is a significant shift. The increases in those limits is, is a good thing for folks who are trying to save. Um, there’s increases in the total catch-up. There’s this, you know, basically this super catchup eligibility for a certain age sweet spot, but really understand what you are able to do and think through how that might impact your savings strategy for 2026 because there are some, some actually significant shifts into, to what, you know, we’re used to seeing.

So what you can do now, right? Plan your allocations early. Review your plans, Roth options, right, because that might be more critically important than ever. And if you’re in those specific ages where you have potential enhancements, see if you can leverage them, see if it makes sense, make sure that your plan allows for it. Um, you know, those are really, really important things you can do now before the year turns so that you’re ready for 2026.

Jason O’Meara
Right, exactly. And, and again, It’s all about understanding what your options are, you know, and what’s available to you. For instance, the new traditional and Roth IRAs, uh, your contribution limits go up 500 bucks next year, right? So from $7,000 to $7,500. The catch up for those goes from $1,000 to $1,100. So, you know, everything tends to be, is, is stepping up, even the health savings accounts have, have gone up a little bit, you know, individual filers can. Uh, you know, contribute $4,400 and family, uh, HSAs, and you can contribute $8,750. So you have the option to put a little more away, assuming you have the ability.

John Walker
Absolutely. Just knowing what your options are, what you’re eligible to do, understanding these new rules, work with your team, work, work with your tax professional. It’s important that you understand. What is available, as you said, and what fits within your overall plan. So, Jason, I, I thank you for some really good tips as we close out the year here to make sure that folks execute on the things that they had within their plan and just start thinking ahead and planning ahead for 2026 as to what they may be eligible to do. Jason O’Meara, CERTIFIED FINANCIAL PLANNER® and market leader here at Mercer Advisors, thank you so much for joining me.

Jason O’Meara: Yeah, of course. Thanks for having me

John Walker: back. And so if what Jason and I shared with you today has you thinking through your options or has you asking questions of how this might impact you and your family, we’re always here to help. Give us a call anytime at 215-558-3500. That’s 215-558-3500, or you can email me. At jwalker@merceradvisors.com. That’s jwalker@merceradvisors.com. And as always, if you’d like to learn more about Mercer and how we think about the markets, I’d highly encourage you to listen to our other podcast, Market Perspectives with our Chief Investment Officer, Mr. Don Calcagni, which you can find at MercerAdvisors.com under the podcast tab. I’m John Walker, Regional Vice President at Mercer Advisors. Thanks so much for listening to the Your Life, Your Wealth podcast. Thanks for joining us.

If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at CFNplan.com.