Amid the global turmoil of this young new year, there are a number of encouraging developments that will help many people – especially retirees and those nearing retirement – boost their savings, reduce prescription drug costs, more of to keep the money they earn and potentially improve their credit rating.
But be careful: it's complicated.
The details of the changes, some related to the phase-in of provisions from the SECURE 2.0 and Inflation Reduction Act of 2022, can be confusing. But the payoff – and in one case, the possible penalty – can be significant.
Here's a summary of the key changes to retirement plans, Medicare, Social Security and consumer regulations that could affect your finances in 2025.
A boost for pension savers
For the first time, people ages 60 to 63 will be able to increase catch-up contributions to 401(k)s and similar workplace plans beyond the maximum for other savers age 50 and older, marking a push to accelerate saving in the 20s previously pushed retirement.
The new catch-up contribution limit for this age group for 2025: $11,250, compared to $7,500 for workers ages 50 to 59 or 64 and older. This is in addition to the $23,500 maximum in 2025 for savers under age 50, bringing the total allowable contribution for workers ages 60 to 63 this year to $34,750.
“People at this stage of life may be in their peak earning years, may have paid off their mortgages and often have college financing in the rearview mirror,” said Christine Benz, director of personal finance and retirement planning at Morningstar. “This can create the resources needed to save more.”
Nevertheless, the new super catch-up regulation could prove difficult to afford for many employees, as is already the case with regular catch-up contributions. Only 15 percent of all eligible 401(k) savers made catch-up contributions in 2023, compared to over half of those who earned $150,000 or more, Vanguard reports.
“Unfortunately, the people who are best able to make these additional contributions are the ones least likely to need to do so, and the people who need it most are the least able to do so,” said Ms. Benz, author of the Book “How to Retire”.
There are a few other changes to tax-deferred accounts that will benefit retirement savers this year. These include small increases in income limits to be eligible for individual Roth retirement accounts, health savings accounts, and deductible IRAs for individuals who are also covered by a retirement plan at work. The income limit for the saver credit also increases to up to $1,000 for single filers earning $39,500 or less and $2,000 for married couples filing jointly earning $79,000 or less.
Additionally, the regular contribution limit for 401(k) plans increased by $500, up from $23,000 last year.
“In detail, these are fairly modest changes, but overall they provide a real boost to people saving for retirement,” said Amber Brestowski, head of advisory and client experience at Vanguard’s institutional investor group.
A cap on Medicare drug bills
For millions of Medicare enrollees — especially those who take expensive specialty medications to treat health conditions like rheumatoid arthritis, multiple sclerosis and some cancers — the deductible for prescription drugs covered under Part D will be a real game-changer this year Capped at $2,000.
The new cost cap, phased in last year, replaces a system that typically required people with Medicare Part D coverage to spend more than $3,000 before qualifying for catastrophic coverage, where insurance accounts for most of the cost would cover the drug costs. Patients are left with an additional payment of 5 percent. The average price for specialty medications is about $7,000 per month, and many cost $10,000 or more per month.
“Five percent of a big number is still a big number,” said Philip Moeller, author of the book “Get What's Yours for Medicare.”
According to AARP, about 3.2 million Medicare enrollees are expected to save money in 2025 because of the cap, and nearly 1.4 million Medicare enrollees will save $1,000 or more. The impact is expected to increase over time as drug prices rise and expensive new drugs come onto the market.
“In addition to those who benefit directly, people who do not take expensive medications can rest easy knowing that if, God forbid, they receive a diagnosis of cancer or another chronic illness that is expensive to treat, they have won Medications Play a Role “They don't have to leave the pharmacy empty-handed because they can't afford the drug costs, or put them on a credit card and rack up serious medical debt,” said Juliette Cubanski, deputy director of the Medicare policy program at KFF, a non-profit organization that researches health policy.
Also new this year: People with Part D insurance have the option to spread their payments out over the year. But if you can do it, Mr. Moeller said, pay the full cost upfront to get the year's drug bills out of the way and avoid paperwork.
Higher earned income limits for early retirees
About 60 percent of workers receive Social Security before they reach the age at which they can receive full benefits (66 and 10 months in 2025). In a bit of a break for the many of them who continue to work full- or part-time, the amount most can earn before the government temporarily cuts their benefits rises slightly to $23,400, up from $22,320 a year 2024.
For those reaching full retirement age this year, the income limit is more generous: $62,160, up from $59,520 in 2024.
Here's how the system works: For every $2 early retirees earn above the income limit, they lose $1 in Social Security benefits until they reach full retirement age. Then, in the calendar year in which they reach full retirement age, they lose $1 in benefits for every $3 they earn. Once they reach full retirement age, Social Security pays back the money they withheld and adds it back to their monthly benefit over time.
“It's important to remember that the reduction in benefits is temporary and will be restored over the course of your retirement,” said Mr. Moeller, author of the “Aging in America” newsletter. “It is an inconvenience, not a permanent loss, and should not be an incentive to work.”
New withdrawal rules for inherited IRAs
The prize — blast prize is perhaps more appropriate — for the most confusing financial change of 2025 goes to the newly clarified IRS rules governing how you must withdraw money from an inherited IRA. “It's complicated, the penalties for not doing it right are significant and awareness is low, which can lead to a frustrating experience,” Ms Brestowski said.
The rules apply to IRAs inherited after 2019 by anyone other than a spouse, a minor child, or a disabled or chronically ill person – typically adult children and grandchildren – and require that all of the money in the account be withdrawn within 10 months years after the original withdrawal is debited upon death of the owner.
If the deceased person was not required to take minimum distributions from the account (currently starting at age 73), the guidelines allow the heir to withdraw money at any time over the 10-year period as long as there are no minimum distributions in the account at the end of it. However, if the original owner was required to make distributions every year, the person who inherits the account must also do so, starting the year after the original owner's death.
The penalty for an improper withdrawal is 25 percent of the amount you should have withdrawn, or 10 percent if you correct the error within two years.
Deciding how much and when should be withdrawn from the account during the ten-year payout period is also complicated. Research from Vanguard suggests that withdrawing the same amount annually in each of the 10 years typically results in the lowest tax bill. However, this may not be the best strategy for heirs whose top priority is increasing the account's value.
“Frankly, the most important thing for people who have inherited IRAs is to get individual advice from a financial professional based on their own situation,” said Ms. Benz of Morningstar.
Medical debt falls off credit reports
There's a last-minute gift from the Biden-era Consumer Financial Protection Bureau to a quarter of Americans who owe money on past-due health care bills: a ban on including medical debt on credit reports. In a move announced this month, the agency also barred creditors from considering certain medical information in credit decisions.
According to the White House, the new rules are expected to eliminate nearly $50 billion in medical debt from the credit reports of more than 15 million Americans. It will also raise their credit scores by an estimated 20 points and could lead to the approval of an additional 22,000 mortgages a year, White House officials said.
“This change provides a more accurate picture of creditworthiness by eliminating debts that people have little control over,” said Allison Sesso, president and CEO of the nonprofit Undue Medical Debt.
Still, it could have unintended consequences. “In the short term, the biggest benefit for consumers is that they no longer have to worry about medical debt affecting their credit,” said Craig Antico, executive director of ForgiveCo, a nonprofit that works with companies to forgive consumer debt. “However, over time, this may result in higher upfront payment requirements as providers face the challenge of collecting payments from patients.”
And what one government gives, another can take away. President-elect Donald J. Trump and Republicans in Congress have already signaled their intention to roll back some regulations and their displeasure with the CFPB. Two lawsuits against the ruling have already been filed by members of the debt collection industry.
As a result, the changes, which were originally expected to take effect in 60 days, are likely to be delayed – or possibly derailed. “We hope the new government recognizes that medical debt is a trap that almost anyone can unfairly fall into,” Ms. Sesso said. “Only time will tell.”