2025 RETIREMENT UPDATE: WHAT PILOTS NEED TO KNOW

Tim:[00:01:17]Well, welcome everybody to another episode of The Pilot’s Portfolio. Glad to have you here. My name is Timothy P. Pope, Certified Financial Planner, specializing in the planning needs of the professional pilot. So, just as a reminder, this show was previously called The Pilot Money Podcast. And, in season two here, we’ve changed the name to the Pilots Portfolio. So, this is the financial show for professional pilots. In today’s episode, we are going to talk about what’s staying the same and, what’s changing as it relates to your retirement contributions and, your accounts and, the updates that we’ve got on some of the carriers here.
[00:01:57]And, then also I’m going to share a provision that bugs me. Okay. When it, comes to your retirement contributions and this is so the newer one than, the legacy one. So I’m going to share that. I’ve been mulling over that for a little while. Maybe I’ve got an unpopular opinion. I don’t know. Love to hear from you guys to tell me what you think. But let’s get started with 401k contributions. Okay. So in 2025, the elective deferral. So, this is the money that you can put in from your paycheck has gone up by $500. All right. So not a huge increase, but it’s gone up $23,000 last year to now $23,500.
[00:02:34]Now, if you’re age 50 and older, you can actually contribute an additional $7,500 in your 401k. And, remember, this is your elective deferral. This is money coming from your paycheck. You gotta go in, you know, you gotta figure out, what percentage of your pay you’re gonna put into your 401k and, then you also gotta figure out where you’re gonna put it, as it relates to your contributions or how you’re gonna invest it. I guess I should say. So, that has gone up a little bit. United, American, Delta, Southwest, your non elective contributions remain the same at 17 percent this year. And, each of those carriers are scheduled to go up to 18 percent starting next year in 2026. Now, Southwest, you guys are getting 1 percent of your comp in a market based cash balance plan.
[00:03:19]Now, that’s scheduled to go up to 2% in 2026. So in 2026, your Southwest pilots 20 percent right out of the gate is going to some type of retirement plan. Now over at United, in the fall, they voted down early implementation of their market based cash balance plan. So we will see when that comes back online, who knows, it might, it might take a while, the IRS is never fast, I’d say. So they voted that down, so to be determined when theirs comes back online. If we talk about IRAs and Roth IRAs, okay, so your contribution limits between 2024 and 2025 remain unchanged. It’s $7,000 is
what you can put in. And, now if you’re age 50 or older, you can put in an additional $1,000. Okay, so it’s for a total of $8,000.
[00:04:10]Your IRA or your Roth. These are not connected with your airline. These are accounts that you would open up, at a custodian of your choice you control how the funds are invested. Essentially, you almost have an unlimited menu of investments that you can choose from, inside of your IRAs and your Roth. Now, if you’ve been listening to the show all last year and you’ve heard me talk about account types often. You rarely hear me talk about IRAs on this show and I’m going to tell you why, okay? So, the IRS says that if you are covered by an employer sponsored plan, so that’s your 401K, so if you fly for a major airline, you are covered by an employer sponsored plan.
[00:04:50]They say if you’re covered by an employer sponsored plan and your modified adjusted gross income is above a certain amount then, you can’t take a tax deduction. So just as a recap, when we say IRA, I don’t lump the IRA and the Roth together, okay? So the IRA is that pre tax account, so you can put money in, and then when you’re filing your taxes, you take tax deduction, and then sometime in the future you’d pull that money out and you’d pay ordinary income tax. Okay, so the big takeaway there is IRA equals tax deduction and then Roth IRA equals tax free income. Okay, so you rarely hear me talk about the IRA with the tax deduction here because of that if then statement that I just made. If you’re covered by an employer plan, and your modified adjusted gross income is above a certain amount then you can’t take a tax deduction.
[00:05:40]So in 2025, if you’re filing your taxes as single, your modified adjusted gross income would have to be below $89,000 in order for you to take some type of tax deduction in an IRA. Okay? If you were married filing jointly, there are several tiers for you to figure out, but for you, the pilot, the covered spouse, your modified adjusted gross income would have to be less than $146,000 before you get any, any tax deductions there. So you can quickly see, right? So, for the majority of you, I mean, look, if you’re single and you’re in year one pay, you’d probably have to start sometime in Q2 to make that work for your modified adjusted gross income to be less than $89,000. Now if you’re married filing jointly and you’re the only spouse that has an income, I suppose, you could start January 1 and have short call reserve or something the entire year after training and make less than $146,000. Okay, so then you, it’s possible that you could get some type of tax deduction there in an IRA. But, then when you look at the numbers and you say, well, where’s my earnings projected to go? And, where’s my marginal tax rate projected to go?
[00:06:49]Then you start to ask yourself, well, you know, even if I could get a tax deduction in an IRA, should I take a tax deduction? Now, in a lower bracket now, and then pay a higher bracket later when I take that money out because I’m going to save well over my career. Or, should I pay the taxes now on a lower bracket and, then in the future pay no taxes on my earnings? Right? So that would be the difference there with the raw. So, you don’t hear me talk about it a lot because for the overwhelming majority of you, you wouldn’t be eligible to take a tax deduction if you put money in. But let’s say you did put money into a traditional IRA. There’s no, no regulation that says you can’t.It just says you can’t get a tax deduction if you do.
[00:07:33]So, let’s say that you do put money into a traditional IRA and you don’t take the tax deduction. When you pull the money out later, you would just pay ordinary income tax on your earnings. Right? You wouldn’t pay taxes again on your principal that you put in, because that’s going to come out tax free, but your earnings is what you would pay taxes on. But, that becomes less attractive when you realize, hey, I could probably do a backdoor Roth conversion, or I could put my money in a Roth if I qualify to do that, and then I won’t pay any taxes on my earnings. You know, as long as I meet the criteria for the Roth and so it’s kind of what I just spoke about.
[00:08:08]But, so that is why I rarely talk about the traditional IRA on this show, because as a professional pilot and earning what you earn, chances are you probably don’t qualify for a tax deduction in a traditional IRA. Let’s talk about backdoor Roth conversions for a moment. I want everybody to put a pin in this, because in a future episode, I think we’re, I want to spend a little bit more time on it. But, with the backdoor Roth conversion, in the future, I want to talk about why I still have folks consider that as a saving vehicle even when I’m telling them they can throttle back on retirement savings. Okay, because the Roth is just an extremely flexible account in and of itself and we won’t get that in today’s episode. I think we should. I think there’s enough there for you guys to understand the nuances.
[00:10:03]Let’s talk about your HSA, for a moment. So this, again, your health savings account. This is the account that is tied to your, health care plan. So, if you signed up for a high deductible health care plan in open enrollment and you signed up for the age then you’re eligible for the HSA. This is a reminder now if you haven’t signed up for the high deductible health plan, you’re kind of locked out of it unless you have a life event. So, that could be, you know, marriage, it could be divorce, it could be, uh, death of a spouse or something like that, or birth of a baby, right? So those life events will qualify you to retweak your health care. But, let’s say that you’re single, your health plan is for just yourself,
your contributions this year are $4,300 in 2025, so that’s up from last year. And, then if your health care coverage, covers a family, it’s going to be $8550. Now if you’re over the age of 55 years old, you can contribute an additional $1,000 into your HSA there.
[00:11:04]So here’s the reminder, remember that the funds in your HSA can be invested. All right? So, you can build a portfolio inside of your health savings account designed to make those funds grow. And, that’s what makes this account so beautiful is you get the tax deduction on the front end so, that helps your current year taxes and then you can allow those funds to grow and then when you pull the money out and you use it for qualified health expenses, then your deduction, but the money that you pull out is tax free. So that’s what makes the account so attractive, and so hopefully while the dollars lived inside the HSA account, they were growing. [00:11:41]You know? Now, sometimes folks will ask, hey, how should I be using the HSA? And what I tell them is typically if you have the ability to allow the money to stay in the account and compound in the account, you’re going to get the biggest bang for your buck, okay? So, that means paying current healthcare expenses from other means outside of your HSA, like your cash flow, like your paycheck. If you’re relatively healthy, that could be fairly easy to do, right? If you have frequent doctor visits, or your children have frequent doctor visits, that might be a little more difficult to do. But, if you need to use the HSA dollars now, and you’re simply using the account as a conduit, that’s okay too, because at least you’re getting the tax deduction.
[00:12:28]Okay? So there we go. We’ve got the 401ks. We had an update on the NECs, the market based cash balance plans, your IRAs, your Roth IRAs, and why I rarely talk about IRAs on this show, and then your HSA. Now earlier I told you that I wanted to discuss a feature of the IRS, the retirement saving provision that bugs me. So, I’m going to tell you about it now. Now if you guys will remember in Secure Act 2.0, so that was a couple of years ago now, congress introduced this idea of a super catchup contribution. And here’s how it works. The regular catchup contributions, you’ve heard me talk about it all throughout the episode. So for IRAs and 401ks, if you’re age 50 or older, you can put a little bit more money in those accounts. For the HSA, if you’re 55 and older, you can put a little bit more money in those accounts there. The super catch up contribution goes like this. If you’re between 60 and 63, you can contribute 150 percent of the regular contribution in a 401k.
[00:13:26]And so for this year, that dollar amount is $11,250. But then after age 63, it goes back down to the regular contribution limit. That bugs me. Okay? I
think I understand the spirit of the regulation. Okay, so someone who is on the doorstep of retirement gets this last chance to stuff money into their tax advantage accounts. Okay, that’s cool. But here’s the deal. If you’re really in a scenario where you’re behind on retirement savings and, you’re concerned about possibly running out of money in retirement. Three years of contributing 50 percent more than the normal catch up contribution is not going to do it for you. Like, when you run the math, you’re going to be terribly disappointed. So, this idea of this super catch up contribution, you know, it makes me grumpy a little bit, right? It bugs me a little bit, because I think it’s misleading, okay? Because, if you’re really in the scenario where you need to catch up you’re going to be looking at several ways to make that a successful retirement, right?
[00:14:30]You’re probably going to be thinking about reducing your retirement expense footprint. You are going to be thinking about how to save way more money than 150 percent of the normal catch up contribution amount. And you’re probably thinking about how to secure additional retirement income, how can I instruct, or how can I do contract trips, or what have you. So, the idea that, you know, that three year window is, it’s gonna, it’s gonna help, but marginally, but it’s not, I think the whole thing is misleading. So, would be, however, in favor of a provision called the get ahead contribution where between the ages of 30 and 33, you could put in 150 percent of the normal catch up contribution. You know, I don’t think that’s misleading at all. Because it certainly, you know, helps you think about and helps you see the power of compounding, you know, over a 30 year period of what those contributions could be so, maybe we need to start a movement there, the get ahead contribution.
[00:15:28]Now, one thing I will say about the super catch up contribution that I think could be useful as an estate planning concept or a legacy planning move is starting in 2026. The IRS says, Hey, if you’re earning more than $145,000, okay, which if you’re over 50 and at a major airline and you’ve got some seniority behind you.You are earning more than $145,000. Okay, so that’s, that’s you guys listening to the show. They say, if that’s the case, then your catch up contributions will have to be Roth. Well, would you look at that? I think that’s a money grab from the IRS. Okay, a grab at some tax revenue because, let’s remember, Roth contributions, we have to pay taxes today. [00:16:18]Number one. If you’re 50 and you have some seniority behind you. Your marginal tax bracket is way higher than what it was years ago, right? When you were early in your career. So let’s think. The IRS says, hey, well, yeah, we can let them save more, but if the marginal tax bracket is higher, you know, we’d like to collect some revenue now. So, if we ignore the fact that it’s a tax grab, here’s what I think it could be useful for. If you’re doing an estate
planning move where you want your heir to inherit a tax free account, then I think that the super catch up contribution could be useful and the forced Roth mechanism could be useful. Particularly, I mean, maybe your spouse inherits it directly after you, they treat it as their own. We get longer time for tax free growth, and then it eventually goes to the heir. They have 10 years to let it sit there in a Roth account, and then eventually they can pull all that out tax free.
[00:17:15]Okay, so I could see it useful for a case like that. But, outside of that, it kind of bugs me. I’d love to hear what you guys think, because maybe you’re thinking about it differently than I am. I think though that that’s going to do it for us. Just a quick episode, quick solo episode to talk about what has stayed the same, what’s changed. I hope you’ve enjoyed this episode of the Pilot’s Portfolio and we’ll see you on the next one.