A Financial Planning Update (2025 Challenges and Opportunities)

With every New Year, we suggest that you revisit your financial goals, understand the  challenges and opportunities that lie ahead, and together with your financial advisors, fine tune those strategies that can best lead to long-term financial success.  

2025 Challenges

In reflecting upon 2024, key economic data and market returns were very similar to that of 2023 such that despite all the election uncertainty, unsettling geopolitical conflict,  and continued economic headwinds (e.g., high interest rates), the key U.S. economic and stock market indexes outperformed the expectations of most economists and financial experts. As we plan for 2025 and beyond, challenges and headwinds are likely to exist that can impact your financial goals. Key considerations include:

• Inflation remains above the Fed target  and in the 12 months through January, the Consumer Price Index (CPI) increased 3.0%. That was the biggest year-over-year gain since June 2024 and followed a 2.9% CPI increase in December’s year-over year gain. Most economists predict that  inflation will stay stubbornly high in 2025. 
• The Federal Reserve has put further interest rates cuts on hold pending more clarity about inflation and the path of  policy in Washington. Consumers hoping for relief from high mortgage rates and other borrowing costs will have to keep waiting. Much like in 2024, interest rates for new mortgages, car loans, credit card debt, and student loans currently range from 7% (e.g., 30-year fixed mortgage) to  over 20% (e.g., credit card debt). 

• There is elevated economic uncertainty due to the rapidly evolving decisions being made in Washington. With news  seemingly being made daily regarding tariffs, government entitlements and spending, immigration, foreign relationships, etc., it is easy to get caught up in the deluge of information and rush to financial decisions that might not be in your best interest long term

• Potential tax law changes will need to be followed closely to maximize retirement and tax planning opportunities. For example, Social Security taxation may be eliminated or reduced, the Inflation Reduction Act energy credits passed into law during the Biden administration may be at risk, and health insurance premium credits through the Affordable Care Act (currently available through 2025) may also be challenged. With the Republican controlled Congress, it now looks more likely that the Tax Cuts and Jobs Act (TCJA), set to expire at the end of 2025, will be extended, such that tax brackets and marginal rates may not change materially. An extension of the TCJA could still be  combined with changes to corporate tax rates, certain itemized deductions, child tax credits, estate tax exemptions, etc.

2025 Planning Considerations  and Opportunities 

Despite all the uncertainty going forward there are still many opportunities to potentially help you reach financial goals based on what  we know today. Taking advantage of such opportunities can be especially important if inflation remains elevated and borrowing rates continue to stay high.

Cash Alternatives for Emergency Funds  and Short-term Goals.

As suggested in last spring’s Financial Intelligence Newsletter, shorter-term cash needs may continue to be best met with historically safe alternatives (e.g., money market funds, short-term Treasury bills/notes, CDs) that are still paying close to a 4% annualized interest rate as of the date of this publication, which is still much better than holding cash in checking/savings accounts that continue to pay close to nothing. Investing in fixed income (bond) ladders can still be a key strategy for some to support specific cash flow needs over a fixed number of years, knowing that at maturity you are almost certain to get a set value back.

Investment Opportunity for Long-term Goals.

For long-term financial goals, investing in quality companies (through individual stocks, ETFs, and mutual funds) with  strong profitability trends, balance sheet strength, and healthy cash flow, have historically provided the best opportunity to beat inflation in the long run. Along with equities, a longer-duration fixed income allocation with government, municipal, and corporate bond holdings may provide better returns and yields over extended timeframes, especially now that the yield curve has become more normalized with longer duration bonds paying higher yields  than shorter duration bonds.

Asset Location for Investment Holdings.

As more fully explained in a November 2024 blog posted by Peak associate Grant Bugner on the Peakam.com website, the type of account you contribute to and utilize for investments is just as important as what your money  is invested in. Having buckets of pre-tax (e.g., traditional 401(k)s and IRAs), post-tax (e.g., Roth 401(k)s and Roth IRAs) and taxable account holdings can provide for strategic withdrawals to cover expenses while minimizing taxes and avoiding any withdrawal penalties. Although long term investors will typically contribute the most to pre-tax accounts to get tax deductions during high earning years, opportunities may exist in lower income years to convert pre-tax funds to Roth IRA accounts, especially if funds held elsewhere can be used to cover any tax impact and cash flow needs during the year of conversion.

Taxable accounts often provide the most flexibility to support unexpected or larger expenses down the road, and can be managed with minimal tax impact if specific types of securities are invested in. The value of strategic asset location also continues when passing on assets to your beneficiaries, where the benefits of post-tax and taxable accounts far exceed pre-tax accounts. Also, specific account types like Health Savings Accounts (HSAs) and College Savings Plan (529) accounts have additional tax benefits if distributions are used for health care costs and college costs respectively.

Social Security Planning.  

Social Security benefits for 2025 include a Cost-of-Living Adjustment (COLA) of 2.5%, which compares to a 3.2%  COLA in 2024. This benefit increase can be partially offset by an increase in Medicare premiums with most Part B premiums going up by approximately 6%. For example, the lowest Part B premium is going from $174.70/month to $185.00/month, an increase of $10.30/month. For those still  working, contributions to Social Security will be based on earnings up to $176,100 as compared to $168,600 in 2024.

The Social Security Fairness Act. This act signed by President Biden on January 5, 2025, will give almost 3 million Americans a boost to their Social Security benefits. This bill restores full Social Security benefits to some public-sector employees, including teachers, law enforcement officers, firefighters, and others who have been affected by two provisions of current federal law — the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). Although the increased benefit amount for individuals will vary, the Congressional Budget Office (CBO) has estimated that eliminating the GPO will increase monthly benefits for 380,000 impacted spouses by $700 on average and by $1,190 on average for 390,000 impacted surviving spouses.  Eliminating the WEP will increase monthly benefits for approximately 2.1 million impacted individuals by $360  on average. Those affected who have yet to file for benefits will be entitled to higher benefits upon filing. Individuals affected who have already filed and were impacted in 2024, will also be entitled to back payments for what they should have received in 2024 without the WEP and GPO. For those potentially impacted, the ssa.gov website has ongoing  updates regarding this Act.

While advocates of the bill are celebrating, opponents of the bill are concerned that this will worsen the viability outlook for the combined Social Security trust funds. According to a CBO cost estimate, the depletion date for the combined Old Age, Survivors, and Disability Insurance (OASDI) trust funds could be pushed forward by approximately six months,  potentially leading to a substantial reduction in Social  Security benefits for all beneficiaries even sooner than  expected, unless Congress acts to address the impending trust fund shortfall. A potential tax cut on Social Security benefits that President Trump campaigned on could also have a significant impact on future benefit stability; however, congress would have to agree upon such cuts. To help fix the predicted shortfall in 2033, it has been suggested that the ceiling on wages subject to Social Security payroll taxes (now $176,100) will have to go up and that the payroll tax rate (currently 12.4%) would need to be increased. Other potential solutions would likely be considered before any decisions would be made to reduce benefits for those collecting or eligible to collect benefits.

Despite the future uncertainties of Social Security, for  those that are close to retirement, most of the key criteria historically used to decide when to collect benefits still hold true (e.g., life expectancy, other sources to cover retirement living expenses, earnings test adjustment if claiming before full retirement age, tax brackets, and spousal/survivor benefit scenarios).

Increased Retirement and Tax Advantaged Savings  Opportunities.

For those not yet having reached full retirement, the contribution to retirement accounts may need to be increased to meet retirement goals. By tactically selecting specific types of accounts to contribute to or eventually convert to, tax planning opportunities can be maximized.

Contributions can potentially still be made for the 2024 tax year to IRA and HSA accounts by April 15, and to Solo 401(k) and SEP IRA accounts by the date you file your tax return. The enclosed “2025 Key Planning Numbers” includes the increases in maximum retirement plan and Health Savings Account (HSA) contributions for 2025 if eligible. Here are some of the key 2025 numbers to note: 

• Maximum 401(k), 403(b), or 457(b) employee “elective deferral” contributions are now $23,500 (up from $23,000 in 2024) for those under 50 and  $31,000 (up from $30,500 in 2024) for those 50 and older. There is also a SUPER catch-up starting in 2025 that can be utilized by workers age 60 to 63 by Dec 31, which allows them to add $11,250 to their 401(k)  accounts (rather than the normal $7,500 by being 50 or older), raising their overall contribution limit to $34,750. Once participants turn 64, they revert to the standard age 50+ catch-up contribution limit. Maximum  combined employee and employer contributions  is $70,000 (up from $69,000 for 2024) or 100% of compensation, whichever is less. If over 50 but not  between 60 and 63, the catch-up allowance brings the total contribution to $77,500 (up from $76,500  for 2024). Total maximum combined contributions for those age 60 to 63 is $81,250.
• SIMPLE retirement plans operate under different rules and allow employee contribution limits up to $16,500 in 2025, plus an additional $3,500 catch-up for employees age 50 and older or an additional $5,250 for employees  age 60 to 63.
• Traditional and Roth IRA contribution limits stay the same in 2025 for those eligible at $7,000 if under 50 and at $8,000 if 50 or over.
• The triple tax advantaged Health Savings Account (HSA) limits are now $4,300 ($5,300 if account owner is age 55 or older) for single plans. Family plan limits are set at $8,550 ($9,550 if account owner is age 55 or older.)

Choosing Between Traditional or Roth (if available) Contributions in Company Retirement Plans.

Traditional (or pre-tax) contributions are deducted from your paycheck before taxes, resulting in a lower current tax bill, while future qualified withdrawals are taxed as ordinary income. Roth contributions are considered “after tax,” so they won’t reduce the amount of current income subject to taxes, but qualified distributions down the road will be tax-free based on current laws. A Roth distribution is generally considered qualified if the account is held for five years and the account owner reaches age 59½, dies, or becomes disabled. Other less common “qualifying” distributions may apply as well.

Withdrawals from pre-tax retirement accounts prior to age 59½ and non-qualified withdrawals from Roth accounts are both subject to a 10% penalty and ordinary income taxes; however, because Roth contributions are made with after tax dollars, the contribution amounts can be withdrawn at any time without tax consequences.

When deciding between traditional and Roth contributions, think about whether you are likely to benefit more from a tax break today than you would from a tax break in retirement. Specifically, if you expect to be in a higher tax bracket in retirement, Roth contributions may be more beneficial in the long run. You should also consider that generally you will have to take taxable required minimum distributions (RMDs) from traditional accounts once you reach a certain age (e.g., age 73 for those born from 1951 to 1959 and age 75 for those born in 1960 or later). Roth accounts are not subject to RMDs during your lifetime, providing flexibility to make withdrawals only when necessary, which can help you avoid unwanted taxes or Medicare surcharges. If funds are not needed during one’s lifetime, future beneficiaries will continue the tax benefits of the Roth account, and most likely will not have to take annual RMDs from the inherited account, although for most non-spousal beneficiaries a rule forcing account liquidation at the end of 10 years may still be applicable.

If your employer offers both options, you can split your contributions if you stay under combined annual contribution limits. For example, if under 50, you can divide your maximum $23,500 employee contribution among accounts, putting say $10,000 in a traditional 401(k) and $13,500 in a Roth 401(k), with no other employee contributions allowed in any other company retirement plan. Keep in mind that, starting in 2026, a new law requires that all your catch-up contributions must be Roth contributions (if available) if you earned more than $145,000 during the previous year. If a Roth option is not available in any case, there may still be an opportunity, depending on income levels, to contribute to a Roth IRA account.

College Savings (529) Plans.

Such plans continue to provide an excellent way to save for college while providing tax benefits for qualified education withdrawals. Most states offer an additional tax break up to a certain amount of contributions each year. For example, Colorado taxpayers in 2025 can contribute to a Colorado 529 plan up to $25,400 as single filers and $38,100 as joint fillers and receive a Colorado tax deduction for such contributions on their returns. Know that contributions are considered  a “gift” for tax purposes and if such gifts including other  gifts for the year are above the $19,000 per person annual exemption limit for 2025, then a gift tax return would need to be filed.

529 to Roth IRA Conversions. Although this program was introduced in 2024, there are still several significant questions that have yet to be resolved by Congress or the  IRS. What is known is that $35,000 of unused 529 balances can be rolled into a beneficiary’s ROTH IRA over one’s lifetime if the 529 account has been open for 15 years and other key requirements are met. State sponsored 529 plans have put out information on this conversion opportunity via their websites, and some states (e.g., CO) have, so far, treated this rollover as a non-qualified rollover, which may require taxation on certain deductions taken in the past. Stay tuned for more information about this strategy in the future.

Charitable Strategies. 

For the charitably inclined who have available discretionary resources beyond those needed to support other financial goals, strategies remain mostly the same as in recent years.

Qualified Charitable Distributions (QCDs). These distributions to charity give the traditional IRA account owner/beneficiary over age 70 1/2 the ability to take normally taxable distributions up to $108,000 in 2025 and have them go directly to charities without taxation. QCDs can count toward one’s RMD as well, thus lowering Adjusted Gross Income (AGI) and taxable income if total distributions stay within the full RMD amount. For those that have used this strategy in the past, it’s worth noting that RMDs for 2025 could be higher than expected due to investment gains the prior year. Also, one can take QCDs from inherited IRAs after turning 70 ½, which can be more strategic than using traditional IRAs for QCDs, especially if inherited IRA beneficiaries must withdraw all funds within 10 years per the introduction of the SECURE Act. Also note that if doing QCDs and still working, one cannot contribute to a traditional IRA to maintain the QCD tax benefits; however, a contribution could be made to a Roth IRA instead if qualified.

Donor Advised Funds. Unless tax laws change, the strategy of bunching contributions to a charitable account to allow for a taxpayer to itemize for a particular tax year and get a larger overall charitable deduction will remain in effect. Transferring appreciated stock/investments from a taxable account to the charitable account avoids capital gains tax upon the sale of such instruments within the charitable account, providing an additional tax benefit.

There is increased talk in Washington about reducing or  eliminating the SALT Cap, which limits State and Local  tax deductions to $10,000 if itemizing. If one can claim more than $10,000 for tax payments, there might be a lower threshold to get a tax break when making charitable  contributions and itemizing.

Estate Planning

For those that have goals to pass along cash/assets to family or friends while living, the annual gift tax exclusion has increased to $19,000 per person in 2025. Joint filers can gift up to $38,000 combined to one person by using  both exclusions. The estate tax exemption has increased  to $13,990,000 per person or almost $27 million for  married couples filing jointly. The estate tax exemption was set to be reduced in 2026 to half of today’s exemption with the sunset of the TCJA; however, a possible extension of the Act and/or new tax legislation may keep the exemption from dropping.

Terry Hefty, Noel Bennett, John McCorvie, Tara Hefty, Jason Foster, Terry Robinette, Brent Yanagida, Julie Pribble, Johnny Russell,  Bethany Aylor, Sophie Berglund, Grant Bugner 

Peak Asset Management, LLC | 303.926.0100 | 800.298.9081 | 1371 E. Hecla Drive, Suite A | Louisville, CO 80027 | PEAKAM.COM 

Advisory Services offered through Peak Asset Management, LLC, an SEC registered investment advisor. The opinions expressed and material provided are for  general information, and they should not be considered a solicitation for the purchase or sale of any security. The information in this material is not intended as  tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This content is developed from sources believed to be providing accurate information and may have been developed and produced by a third party to provide information on a topic that may be of  interest. This third party is not affiliated with Peak Asset Management. It is not our intention to state or imply in any manner that past results are an indication of future performance. Copyright © 2025 Peak Asset Management