The new year is fast approaching, and with it the Internal Revenue Service (IRS) has announced that it will implement new policies that will increase the limits of the amounts individuals can contribute to their pension and retirement plans. This is done as part of the annual cost-of-living adjustments for pension plans and other retirement accounts, as well as a concerted effort to allow older beneficiaries to boost their savings for retirement.
What Are the Increases proposed by the IRS?
The most popular retirement account, the 401(k) plan, will have its contribution limit raised in 2025, which will allow workers to set aside up to $23,500 which is a moderate increase from the $23,000 cap in 2024. It is not the only plan that will increase its contributions, those enrolled in 403(b) plans and the federal government’s Thrift Savings Plan will also see their annual contribution limit rise to $23,500 in 2025, up from $23,000 in 2024.
The IRS said in a statement about the new changes, specifically regarding the new rules for those aged 50 and older “The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $31,000 each year, starting in 2025.”
There is one type of account that will keep the current limit, and that is the IRA accounts, which will still only allow a $7,000 contribution for 2025. As the statement continued to explain “The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2025.”
Tax Deductions and income thresholds
Contributions to retirement accounts are not the only changes the IRS is looking to implement in 2025, it will also increase some of its deductions to adjust them to the cost of living adjustment salaries go through. This, along with a shift in the income tax brackets, will ensure that those who technically earn the same as they did before because of inflation do not continue to climb tax brackets and are not burdened by more taxes than they should reasonable pay.
Having said this, in 2025, the standard deduction will increase to $15,000 for single filers and married individuals filing separately, reflecting a $400 rise from the prior year. Married couples filing jointly will see their deduction grow to $30,000, an $800 increase. For heads of households, the deduction will climb by $600, reaching $22,500.
The adjustment of the tax breaks will also be important for individuals. It will include revisions to the income thresholds for all seven federal tax brackets. It is important for workers to remember that not all income is taxable. Taxable income is obtained after subtracting the greater of the standard or itemized deductions from your adjusted gross income, which is why the adjustment of the standard deductions is so important for taxpayers.
Once the taxable income is calculated it is divided into portions taxed at progressively higher rates, depending on the federal tax bracket you fall into. These brackets are:
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 37% for incomes over $626,350 ($751,600 for married couples filing jointly). This bracket will not change in 2025 and continues to be the same as in 2024.