← The Practical Planner
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- [00:00]
A
Foreign what is up? And welcome back to another episode of the Practical Planner Podcast. I'm your host, Thomas Kopelman. Here with me, Dave Haughton. Dave, first episode to start the new year. I know it's not coming out, but how's everything going? How we feeling starting the new year?
- [00:25]
B
It's great. Yeah, I'm excited to be back at it and excited for another year and more content to come.
- [00:34]
A
Yeah, I'm excited too. I my own podcast, I'm moving from no guest or from guest to no guest, which is going to be a very big change. But I like being able to come onto this one and do it with somebody else who has a very different expertise than me. So I'm excited for this year. We're going to have a lot of good episodes with us and Ann and potentially some guests as they come about. But one of the topics that we wanted to talk about, and we're actually pushing to the top of the queue, is just the important numbers for 2025. And it feels like a whole job just to keep track of how, how much these numbers change every single year. And then we are going to have the sunset and all that's going to be different. And then we but now we're go up with inflation. So today we're not going to hit on just the estate planning numbers. We're going to hit on all of the financial numbers advisors need to know. But I'm going to hand it off to you to just start with the main estate planning ones that you think are important to talk about.
- [01:28]
B
Yeah, they're two big ones and you know, they change every year. What's interesting is the annual exclusion for gifts. So that's the amount of money that you can give to any person per year without affecting your lifetime exemption. So you have this big lifetime exemption that's going to be 13.99 million. If you give in excess of this annual exclusion, then you start to creep into subtracting from that. It was $18,000 in 2024. It's going to go up to 19,000 in 2025. So that means per person you can give up to $19,000 without affecting your lifetime exemption. Now, it's interesting because for years and years it was $15,000 is what you could give away. And I would say it was like that for five or six years. I'd have to look back. But with inflation, it's been going up year after year after year. And it doesn't seem like a lot. But you break that up over kids, over Grandkids, your giving power is a lot more without affecting your exemption, especially if we're talking about things like super funding 529s when you can give five years worth of gifts. So it's an important number to know that it's not going to be $18,000 anymore. Now it's going to be $19,000. The other one that's going up pretty substantially is the estate tax exemption. The lifetime gifting and death estate tax exemption is going up to 13.99 million. Wish it was 14 million. That would make things a lot easier for us estate planners to calculate things. But it's going to be 13.99 million. You double that for spouses. So we're talking almost $28 million you can give away before the federal estate tax is going to kick in. So these are important numbers to know, and they are big jumps because of inflation. One thing I do want to mention, though, is that if you have a state estate tax, a lot of these state estate taxes are not indexed for inflation. So you know that the federal exemption is increasing every year in Massachusetts, like where I am, it's not. It's 2 million and it is not indexed for inflation. Who knows when the legislature is going to address it again? But these numbers are going to go up federally every year. We'll see what happens with Sunset. But for state purposes, you're kind of stuck.
- [04:06]
A
It's funny too, because like, in Massachusetts, that's probably like 150% of the value of a regular home there. So it's like everybody's paying the state of state tax.
- [04:15]
B
Yeah, it's, it's, it's, it's good business to be an estate planning attorney in Massachusetts because basically everyone needs some kind of estate tax planning.
- [04:26]
A
Yeah, I think you made a good point. Like, every time I sit down with a client, they'll be like, oh, my dad gave me. Not every time, but like, they're like, hey, for, for Christmas, my dad gave me 15,000 again. I'm like, why 15,000? Like, oh, that's the limit. I'm like, tell your dad the numbers have changed in this last eight years because it is true. People just knew that number for a long time and they've just not thought about it. Which reinforces the reason why we go through this and we update it every single year because most people do not track finances carefully enough to see it. The other note on this is you had a post a little bit ago about some NFL QB giving gifts to his lineman, which is obviously a Big thing. And I thought it was a really good example to help showcase how the exemption works. And you can correct me, but it was like they started out with, let's just make one up here, right? You're giving a car of $100,000 to each of your linemen. Okay. Average person says you use 500,000 of your exemption, but that's wrong, right? It's actually like, hey, each person got $100,000 car. You, you can reduce that by 18,000. Oh, wait, then you have your spouse, she can be part of the gift. That reduces it by another 18,000. And so you only end up using that difference there of the 100,000 minus the 36, which like you said, is moving up again next year. But I had a post a couple weeks before that just walking through the gifting because I can't tell you how often this confuses people how gifting works. They just don't understand that. And it's not actually taxable when you go over that number. And I know this is basics and hopefully any advisor listening at least knows it, but I think it's always good to still reinforce it, right? Like this is not a taxable event unless you are already across the threshold. But that is important to know. I have a client who parents are uber wealthy from a different country. They own a company that's worth like a billion dollars and they've used all their lifetime exemption. And so now they have this really hard situation of like, how do we give money to our kids? Because every single dollar we give, we pay that estate tax on.
- [06:24]
B
Yeah, absolutely. It's, it's a very misunderstood area of law. And I know what you're talking about is Brock Purdy giving the cars to the linemen. And the issue is like, you know, a lot of times someone like, like the San Francisco quarterback, he hasn't made a lot of money yet. So maybe they're not thinking about it. Right? But that's someone who's going to. Potentially their net worth is going to increase exponentially if he's good. I mean, who knows, who knows what's going to happen? But using up your exemption this early on, I mean, that could have an impact later on. So you try and find ways to limit the impact of that. So rather than giving from yourself, you give from yourself and your spouse, that doubles the exemption. Rather than giving it just to the individual you want to give it to, you give it 50, 50 to them and their spouse. Now you're doubling it on your side with you and your spouse, you're doubling it on their side with their and their spouse, you're potentially quadrupling how much you can give without affecting your exemption.
- [07:33]
A
Could they even take it further and be like, I bought this in December, I financed half under your name, I paid for half. And then January 1st comes and you pay off the loan and now you use no exemption.
- [07:45]
B
Yeah, absolutely. Yeah, it's, it's by calendar year. So if you cross tax years, that's another way that you can increase your gifting power. So there's so many ways, you know, and a lot of it comes down to, you know, not necessarily it depends on your net worth. But you know, a lot of clients, they're not worth $30 million, you know, but they also, they don't want to pay an accountant to file a gift tax return if they don't have to. And so, you know, taking some of these strategies and staying under the limits, because if you go over the limit, you have to report it to the government, you have to file a gift tax return, a 709. And unless you're, you know, financially savvy with those forms, you're going to have to hire an accountant. You're going to pay an accountant to file that form. Staying under the limits obviously makes that a lot more simple so that you don't have to report anything. Saves you some money. Yeah.
- [08:40]
A
Okay, cool. I think next place to go is all the other numbers and I'm going to end with 401ks because they chose to make it very confusing this year. And just chime in, add anything that you feel like is needed as we go. But starting with IRAs. So IRA is super simple. It's going to be $7,000, the exact same as 2024. And there's a thousand dollar catch up contribution if you're over 40. So the max you could do is $8,000. You know, I think it is still important to understand the income limits on them because, you know, my day to day, I see all the time people contributing to a Roth IRA when they can't, or putting money in a traditional IRA thinking that they can deduct it. So know that with a traditional IRA you can always contribute, you just can't always deduct. So if you are under $150,000 of income and you're single, you can fully contribute and deduct it. Or that's for Roth IRA, sorry, 79,000 for traditional IRA, single and 126,000 married. So if you're under that, you can contribute, you can deduct It. But here's a financial planning tip. If you're under that number most times you should be doing Roth. Right. You're in a very low tax bracket. There's very few situations where I see traditional IRAs make sense. Unless low income throughout your entire career for Roth IRAs, a little different. If you're under 150,000 single or under 236,000 married, then you can contribute to a Roth IRA directly. If not, that's where the backdoor Roth matters. Right? You can use the ira, you cannot deduct it and then you can convert it over to Roth and that is tax free as long as you have no money in a traditional ira, SEP ira, simple ira, that's known as the pro rata rule. Hopefully everybody listening understands the pro rata rule. But like all the time I see people that don't. Right. They're doing the backdoor Roth every year they're self filing their taxes and they had no idea that they were contributing to a SEP IRA through their business or that they had a rollover from an old 401k that was in a traditional IRA. Like this happens all the time. The other issue is I see people do the traditional ira. Their tax person doesn't deduct it, they have no idea, they don't review their tax return. And every year they've been doing non deductible IRA contributions. And that's pretty much pointless in my opinion. Right. You're basically, you're paying income taxes on the growth. I would much rather be contributing to a taxable account than to a non deductible ira. But here's a practical pointer. I have a client who, they do not have a place to move an IRA yet. We know in the next two years they're going to set up a 401k and we're still doing non deductible contributions in these two years while we wait. Because he's so high income, he's investing over half a million dollars a year and that gives him 7,000 of room that would never have existed otherwise. And we're just using that as a conservative part of his portfolio of not very focused in on growth. I've never, that was the first time I ever thought it actually could make sense to do that. But again, it's only 7,000 of room. So if you know you're going to have ability eventually to convert, it can be a good tool.
- [11:41]
B
Absolutely. Yeah. And I think, you know, you were mentioning that people, you think it always makes sense to go Roth rather than Traditional from an estate planning perspective. You know, a couple of years ago we had the Secure act where now when beneficiaries are inheriting These accounts, these IRA accounts, they have to withdraw it all within 10 years. They have to realize all that income within 10 years. Same for traditional or Roth. Just think about the difference between a million dollar, let's say a million dollar IRA that you have to withdraw $100,000 per year, that's taxable income to get it out versus having a million dollar Roth that could sit and grow until the 10th year and then withdraw it all tax free. The power of that for the beneficiary is a lot more, I know there's a lot more aspects of that in determining, you know, when you're funding it, whether you want to do that. But just another thing to think about is what you're funding and what you're going to be left with and how the beneficiaries are going to be taxed on it.
- [12:51]
A
Yep, yep, exactly. I, I just feel like if I'm in that low of a bracket, I'm probably picking Roth because I still, in my opinion, I assume taxes will go up in the future. But for high earners in the 37% bracket, right. You defer at that bracket in your 401k, not your IRA, but you withdraw through back bracket. So it's really hard to get to that 37 and fully be in 37, let alone just touch it. But if you're at 12 and you're choosing to reduce it, it's like you're probably going to be in 12 and if taxes go up, you're probably going to be above that. I would choose Roth in most situations.
- [13:25]
B
Right. You know, and the other thing that I find a lot is when people talk about tax brackets, they think about it like it's a cliff. Right. Like I'm in the 24% bracket now. You know, you're only in it for that portion that you went above that, that amount. It's not like it's all taxed once you creep into that bracket. And I find that that's something that people don't necessarily understand and they try to stay under certain brackets, but they don't understand, like it's really not, it's not the end of the world.
- [13:57]
A
Totally. And there's advisors who think that, like you'll see advisors arguing about why you should always do Roth today because you don't want to pay in the future. 37% on that withdraw. And it's like you understand nothing about Taxes, because it works the same way, right? In the same way. Today you fill up brackets in the same way you withdraw through brackets in retirement. So be like, here's why you should use this permanent life insurance product, for example, right? And you're like, no, you're just really misunderstanding how taxes work. So it's not just an average person thing, but the average person does not understand that at all. Right, Cool. Okay. So health savings accounts to think about. So next year FSA is still 3300. FSA I think, is a really good tool if you have a health plan that allows for it. But it's one of those things that like, make sure you use it. Right. I see people all the time put in 3300 and then they spend like a thousand dollars and they're like year end just spending on random things or buying things or they lose the money. You're better off, like, waiting to contribute to what you know, sometimes people just do their deductible because they're like, hey, I hit this every year, I'm good to go. But it's a use it or lose it type thing. I am way more a fan of HSAs for a lot of reasons. So in HSA next year, you can put in 4300 if single and 8550 if a family. Why they didn't double it exactly makes no sense. They typically always double it, but that's the rule. And the best part about the hsa, right, is it's pre FICA tax. It can be invested and grow tax free, and it can be used tax free in the future. And if you receive, if you keep receipts, you can reimburse yourself at any period down the line. So like all my clients, I say spend from cash. Use your HSA in the future knowing that if you're ever in a dire situation, refund yourself from prior year expenses. So it's really a great tool. And to be honest, health insurance is kind of a shit show today, right. Whether I can, I don't know if I can say that on here or not, but in general, right. I see a lot of times high income people that I work with say I'm going the lowest deductible plan. And they don't realize that the low deductible is great, but with all the premiums they pay, they would actually save money by going to the HSA plan and having way lower of, of a premium even with a higher deductible. Like, people don't do that math to say at every thousand of spending. With each health plan you pick, what is it equal to be? What I find is probably 75% of the time the HSA ends up being the lowest cost plan even at highest spending amounts. And then you factor in the hsa, HSA match tax advantages. A lot of times you come out.
- [16:31]
B
Ahead and correct me if I'm wrong because it's been a few years since this was my job. But the HSA expenses I feel like are not tied to calendar year. For example, with 529 usually you want to match the expenses with the calendar year that the expenses came out. With the hsa, I feel like you could go years back. Right.
- [16:59]
A
So that if you were eligible. Yeah, so like if I have an interest eligible plan next year we have a baby, we pay 10 grand. 25 years from now I can reimburse myself 10 grand for that. There's no like limitations there. Which is why, especially for high income households, right. If you're a low income household and let's say you're only being able to like get your 401k to the match, this is just a way to pay for health costs. If you're a high income person, right. You max out all your tax advantage accounts quick and you're investing a ton external to that. So the thought is why give up the most tax efficient account today versus you basically get a Roth IRA and a traditional IRA in one with the flexibility of being able to pull it out without taxes by having those past receipts. So it's like for me, in order of priority after your 401k match, it's the number one place to go. And as long as you have the income and the ability to do it, letting that grow is the biggest benefit. Right. If you do 8550 next year and you're in the 37% bracket, that saves you a few grand. If that gets invested for 25 years and it grows, you know you do that every single year and now you have a couple hundred thousand of growth in that account. Think about the capital gains taxes, that saves you. That's the biggest benefit. And I financial planning mistake I see all the time is people focus on deductions and they don't necessarily think about tax free growth. Which is why the 529 is advantageous. I'm sure you'll see this from advisors. Advisors will say only use it if you're in a state that has a tax credit or tax deduction. Without even factoring in that. I tell all my California clients that are planning for college to do it right. They're avoiding 23.8% capital gains and 13.3% California. Right. If college costs 400k, you put in 200k and you avoid 200,000 of capital gains and save 37%. I mean that's a $74,000 tax savings and you got no deduction and it didn't matter, right?
- [18:47]
B
Yeah, I think that. And a lot of times those deductions are so low. Like. Yeah, yeah, it's $2,000. So it's like you'd save like 60 bucks a year. The other thing, you know, this isn't necessarily hsa, but when we're talking about benefits, a mistake that I see happen and I saw it with one of my buddies actually, you know, they were funding the FSA for daycare.
- [19:14]
A
So the depending care fsa.
- [19:16]
B
Yeah, yeah.
- [19:16]
A
That's a five thousand dollar number.
- [19:18]
B
Yeah. And I got a text message that basically said, this is great. You know. You know, we spend like 30, 30, 000 on daycare a year. So I'm gonna do 5,000 and then at my wife's work she's gonna do 5,000. I was like, whoa, can't do it. And they don't. They're not necessarily talking to each other, you know, to know that each other are claiming it. So that's one thing that I've seen go haywire. I don't know if it gets caught or what's happening.
- [19:45]
A
That what happens is you do that, then you have to go tell your company they have to basically reissue A W2. Not fun to do it. But that's one that hopefully they adjust for inflation and sometime because like most families are saying like two to three grand a month. So five grand a year is just not really. It's worth doing. Absolutely. Right. You get to pay for $5,000 pre tax. Great. But it'd be nice if it was larger.
- [20:08]
B
Oh, it definitely would. Believe me. If my little one, it's. It's like I get a huge raise when my, when my first one went to kindergarten. Yeah. And I've got another one once, once she's out of daycare. And you know that that's basically a raise for me.
- [20:24]
A
Literally. Literally. Okay, so other ones that go through. So some of the other accounts, SEP IRA is 70,000 next year. But based on income or profit. Right. So if you're an s corp, it's 25% of W2 wages. If you're not an S corp, it's 20% of business profits. Simple IRA is 16,500 and I think Simple IRAs still have the same catch up contribution. Yeah, they have a catch up contribution of they're basically following how 401ks do it. So it's like if you're 60, 61, 62 or 63, you have the weird like double catch up contribution which is either it's $11,250. It, it's crazy. But simple IRA is something I never recommend ever because basically they were just cheaper 401ks. But now you can set up 401ks for a cheap cost and when you have it, you can't do backdoor Roth contributions. And they don't have Roth. So like no reason in my mind to really use it then next one dependent care FSA. We talked about 5,000, we talked about annual gifting. You mentioned the 529 super funding. That's $190,000 now. And you know, let's say you did $190,000 next year and then the next year it goes up, all you can contribute is that increase. So if it goes from 19 to 20,000 next year, if you're married, you could do another, or the year after that could do another couple thousand dollars. But that's it, right?
- [21:52]
B
Yeah. And that's an important distinction because people don't really know how when you do the super funding, you're taking that amount that you're gifting, you're dividing it by 5.
- [22:04]
A
Yep.
- [22:04]
B
It's not like front loading. The, the, the years. Yeah, you know, like up to the limit. It's literally divided by five. So if I, if I put $50,000 into a 529, they would say I use $10,000 per year for the next five years. And I don't have a choice for how that's going to work. So I would have an additional $9,000 per year that I could give. So when inflation goes up, it just means that each year you have that extra amount to give.
- [22:32]
A
Yep, exactly. Cool. Okay, so then the last one we really just need to talk about is 401k. So I hit on this. But 401ks are now moving to 23,500. That's up $500,000 from 20, 20, 24. Catch up contribution if you're 50 to 59 is 7,500. If you're that 60, 61, 62 or 63, then instead of 7,500 now you can do 11,250. It's like 150% of that catch up contribution. And then if you're over it. 64, 65 from what I've seen is you can only do the 7500 as well, which is really weird. Maybe that's something that we fact check, but there isn't a whole lot of good info out there on it. And then the total amount you can do to a 401k is 69,500 if you're under the age of 50. But then you can add the catch up contribution on top of that. And then the one other one I like to mention is the Mega Backdoor Roth. So this is where the 69,500 number is advantageous. So a lot of my high income clients at big companies or that have solo 401ks do this. They do the 20, they'll do the 23,500 pre tax. The they'll get their match and then after that whatever room is remaining minus 69, five is what you could do Mega Backdoor Roth wise. Because the 23, 5 only applies to Roth and pre tax. The Mega Backdoor has this separate limit so situation there. I mean you can get quite a bit in via Mega Backdoor which is just. Nobody's gonna be mad in their 30s and 40s or even younger getting all those Roth dollars in.
- [24:03]
B
Absolutely.
- [24:04]
A
All right, cool. Well, that's everything that we needed to go through today, everybody. We appreciate you listening. Please don't forget to rate and subscribe. And if you have any topics that you want us to talk about, feel free to reach out and we'll make sure to add them into the list.