If you want to save on taxes, do what the government wants you to do. Indeed, save for retirement so you don’t burden your family or neighbors as you limit your livelihood in old age, and encourage employees to save.
Once standard, today government employees and 15% of private workers get Defined Benefit Plans with slow vesting and definite formulaic retirement payouts that may not compete. Therefore, two thirds of us must manage stock and bond investments and save sufficiently, balancing risk while maximizing return. The best 2025 options, complexities summarized below, vary with individual situations.
My planning clients never bemoan saving too much to make up for myriad mistakes. I applaud investments in real estate and endorse securities investments taxed at capital gains rates—but it is hard long-term to beat tax deferral, not only of ordinary income from jobs but also earnings on that income.
Savers Credits are awarded to squirrels with MFJ earnings under $79,000. Don’t forget to maximize Health Savings Accounts (HSA limits of $4,300 for individuals and $8,550 for families) and know that money unspent adds to retirement without penalty. Individuals must pay an additional 10% penalty on withdrawals before age 59 1/2—added to the taxable income—but there are exceptions for items like death, disability, homebuying or tax levies.
Traditional IRAs or job retirement plans lower income tax when taxpayers are struggling with housing, children and when their income is likely at its highest and frequently tax retirees on 1099Rs when they may earn less.
For 2025, squirrels can pack away $7,000 with catch-up contributions of $1,000 for those 50 or older. Roth plans in IRAs or work plans give no deductions on earnings, but withdrawals are tax free. Roth IRA phaseouts begin at $150,000 for singles/HOH or $236,000 MFJ.
Roth plans are advantageous for taxpayers whose income may not drop or for those who, watching bipartisan deficits, anticipate higher tax rates. Taxpayers advantageously do Roth conversions from IRAs or employer plans in relatively low earning years.
SEP (Simplified Employee Pension) and SIMPLE Plans are employer-sponsored forms of IRAs that are easier and cheaper to manage than 401(k)s or defined contribution plans. They encourage top employees to hire on and stay put.
SEP eligible employees must be 21 years old and earning minimum compensation for at least three of the last five years. SEPs work best for employers who don’t care to fund employee plans or make elective contributions. Employers gain flexibility in contributions which may go up or down with business prospects. Employers can contribute the greater of $70,000 or 20% of net income (Schedule C profits minus SE taxes). Generally, I tell entrepreneurs SEP limits with half-completed tax returns.
Employers with under 100 employees can establish SIMPLE plans. Participants with individual accounts, vested immediately, can defer taxes on $17,600 with catch-up contribution limits of $3,500 or, for those over 59, $5,250. Both employees and employers can contribute but employers must make non-elective two percent contributions or 100% matching contributions of at least 3%.
Some entrepreneurs and most large private employers offer 401(k) plans while nonprofits and governments offer similar 403(b), 401(a) or 457 plans. The 401(a) plans give less employee flexibility in contribution rates (up to 25% of earnings) and investment choices, but higher $70,000 limits. Employees may also have 457 plans. These are more burdensome to open and administer with regular tax reporting, but employers get greater choices to exclude classes of employees and loans can be granted.
Employees with 401(k), 403(b), 457 or thrift savings plans can contribute up to $23,500 and employers can match up to $70,000. Those over 50 get $7,500 catch-up contributions—or $11,250 for those aged 61-3.
Is this not enough for High-Net-Worth Individuals? Elsewhere, I have discussed ESOPs, RSUs and ISOs, realty, stocks, businesses and insurance. Entrepreneurs and key employees can establish slowly vested Defined Benefit Plans with maximum contributions depending on age—older is better—income and years in business—and this could give business deductions of up to $280,000.
Our country needs more than 497,000 disciplined 401(k) millionaires. Kiplinger’s says that a 25-year-old saving just $5,000 yearly and earning 7.5% can get $1,265,772 by age 65.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
