2025 financial outlook: 5 ways to prepare for the new year

As you prepare your financial outlook for 2025, there's a lot you simply cannot predict. Will the stock market continue setting records or fall? Will the Federal Reserve keep cutting interest rates? What new legislation will the government pass that may impact financial markets?

The last few years have been a bumpy ride. Inflation soared in 2021 to the highest in decades, the S&P 500 crashed in 2022 before hitting new records in 2024, and the Federal Reserve rapidly increased interest rates to tame inflation before finally changing direction and cutting rates in September 2024.

Looking ahead to 2025, the country will see whether inflation is truly under control, if the economy and stock market can continue to grow, and how quickly the Fed will bring interest rates back down. There’s a lot that could change throughout the year.

While you can't avoid uncertainty in life, you can manage it by focusing on the parts of your financial plan you can control. Here are five keys to keep in mind while you chart your financial course for 2025.

1) Prepare for tax changes

2025 could be an eventful year for tax changes. Many of the 2017 Tax Cuts and Jobs Act provisions are set to expire at the end of 2025. If so, individual and corporate tax rates will increase. In addition, several tax breaks will end, such as:

• Larger standard deductions for your tax returns
• The enhanced Child Tax Credit
• The 20% deduction for small business income that began in January 2018

People living and working in states with high tax rates could see some relief, as the cap on the state and local tax (SALT) deduction is also scheduled to end.

If you plan on leaving a large inheritance, the larger federal estate tax exemption is set to expire on December 31, 2025. It will cut the tax-free amount you can leave to heirs from $13.9 million in 2025 down to around $6 to $7 million, based on inflation trends. However, you could still make gifts up to the more extensive estate tax exemption in 2025. Consider transferring assets during 2025 while you can still take advantage.

If you use a Health Savings Account, pre-tax contribution limits are increasing to $4,300 for individuals with self-only coverage and $8,550 for family coverage in 2025. Catch-up contributions for those over 55 will remain at $1,000 per year. Those who use a Flexible Spending Account can contribute up to $3,300 a year pre-tax beginning in 2025. If you want to increase your contributions for 2025, be sure to do so during your company’s open enrollment period or check in with your human resources department.

Additional 2025 tax law changes will depend on what legislation the government passes, if any. Stay in touch with your accountant to understand how the evolving tax landscape will impact you.

2) Adjust for inflation and interest rates

The Federal Reserve believes inflation has fallen close to its target of about 2% per year. This is why it lowered the federal funds target rate range in September and November 2024, with additional cuts expected to support the economy.

Think about how this might impact your budget. After years of getting squeezed by rising prices, you might have a little more financial breathing room. If so, consider how to best use this extra money, like increasing your retirement contributions.

Falling interest rates could also bring down borrowing costs, especially for housing. If you took out a loan or mortgage while rates were high over the past few years, it could be worth refinancing to a new lower-rate loan with reduced payments in 2025.

Finally, remember that economic predictions are not guaranteed. It appears that inflation and the job market will remain steady in 2025. However, keep an eye on market data and adjust as needed throughout the year. Protect yourself by maintaining an emergency fund of three to six months of living expenses. That will give you a cash buffer for whatever 2025 brings your way.

3) Check in on your retirement accounts

Take stock of all your different retirement accounts. Ensure the investments match your goals, retirement timeline and risk tolerance. Don't forget about older accounts you don't actively use, like a 401(k) from a past job. Consider consolidating these funds into another retirement account through a rollover.

As you plan for 2025, decide how much you will contribute to your retirement accounts. Aim as close as you can to the annual contribution limits or whatever amount you are financially able to do.

For 2025, the annual contribution limit for 401(k) and 403(b) plans is $23,500, up from $23,000 in the prior year. The limit on annual contributions to an individual retirement account (IRA) remains $7,000, however the income ranges for determining eligibility to make deductible contributions were raised. This could help some individuals that otherwise would have been phased out based on their income. If you are 50 or older, you can save more per year through an IRA and a 401(k) with catch-up contributions.

Watch out for contribution restrictions. These are income limits that restrict who can contribute to a Roth IRA. The IRS charges an ongoing 6% tax penalty until you withdraw any disallowed Roth IRA contributions. There are also income limits on deductible contributions to a Traditional IRA if you or your spouse are enrolled in a workplace retirement plan.

4) Focus on long-term investment strategies*

No one can predict exactly what will happen in the stock market on any given day, week or month. Instead, it’s best to focus on long-term goals and objectives with your investment decisions.

Build a diversified portfolio to manage risk and volatility. Mutual funds and exchange-traded funds (ETFs) can help handle this work for you. Balance risk and return between higher-risk growth assets like stocks and fixed-income assets like bonds. Check your portfolio and see whether any holdings are off your target allocations. Adjust as needed.

You could also see if you could use tax-loss harvesting to sell any investments that have lost money and replace them with something similar.

Above all, avoid making rash investment decisions based on emotions or market swings. Slow and steady works best with investing.

5) Account for upcoming major life changes

Consider any major life changes you see on the horizon for 2025. Do you plan on getting married or having a child? Do you want to buy a new home? Do you expect to change jobs?

These life events could change your tax bracket and filing status. After any significant household change, submit a new IRS Form W-4 to your employer so you can update your tax withholding as needed. That way, you won't overpay or underpay during the year.

You and your spouse or partner should review your employers’ benefit packages in anticipation of any life-changing events like a birth or adoption. Some employers offer more advantageous benefits for families than others. Even if you’re not anticipating any major life changes, you should still compare benefit packages during your open enrollment periods to make sure you’re getting the best value for your money.

You should also review your household budget and consider how you'll adapt in the new year. Thinking ahead will minimize any financial surprises.

Citizens Wealth Advisors* are available all year long

Improving your 2025 financial outlook depends on the same fundamentals as any other year: adjusting to tax and regulatory changes, managing your finances, saving for retirement and having a personalized plan to help you reach your long-term financial goals.

Citizens Wealth Advisors can help you create and tailor your plan based on your personal situation and unique objectives. Ready to build your 2025 financial plan? Find a Citizens Wealth Advisor* in your area.

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