💼 Have You Really Maxed Your 2025 Benefits?

☕ Good morning SenseMakers!

It's mid December, and most high earners are focused on year end projects, holiday plans, and maybe a bonus landing in their account. What they're not focused on? The benefits portal they haven't opened since October.

Here's the problem: contribution limits for 401(k)s, HSAs, and FSAs increased again for 2025, and most people set their elections years ago when their income was lower. The result? Thousands of tax advantaged dollars left on the table, year after year.

If you're in the 32% federal tax bracket or higher, every pre tax dollar you move into a benefit account saves roughly 32 cents of current income tax, plus potentially payroll tax in the case of HSAs and FSAs. Over time, these accounts aren't minor perks. They're a front line tax strategy that often decides whether $5,000 to $10,000 per year grows for your future or goes to the IRS.

Today, we're walking through a simple year end benefits sweep. Four accounts, 10 minutes of your time, and the potential to move thousands of dollars from taxable to tax advantaged before December 31.

🏦 First Pass: The 401(k) and Catch Up Checklist

Start with the biggest number. For 2025, the 401(k) employee deferral limit is $23,500. If you're age 50 or older, you can add a catch up contribution of $7,500, bringing your personal total to $31,000.

Here's your checklist:

1. What are your year to date 401(k) contributions?

Pull up your most recent pay stub or log into your benefits portal. Look for the "year to date" line under 401(k) contributions. Are you on track to hit the full $23,500 limit by your final paycheck?

2. Did you turn 50 this year?

If so, you're eligible for the $7,500 catch up contribution, even if your birthday is late in the year. Many high earners don't realize this and leave thousands on the table.

3. Are you short of the limit?

Here's a common scenario: you're earning $300,000 and contributing 10% of your pay all year. That's $30,000 in total pay going into the plan, but if your contribution percentage hasn't kept pace with salary increases or bonuses, you might be $2,000 to $4,000 short of the employee deferral limit.

The fix? Many plans allow you to temporarily raise your contribution percentage for the remaining pay periods or redirect a large portion of your December bonus into the plan. You won't feel it in your lifestyle because the bonus is larger than usual, and you'll capture the full tax benefit.

One caution: Some plans calculate the employer match per paycheck, not annually. If you front load contributions early in the year, you might reduce your total match. Check your employer-sponsored retirement plan's rules or ask HR to confirm whether they use a "true up" feature that ensures you get the full match regardless of timing.

💉 The HSA Decision: Spend Now or Invest for Later

If you're enrolled in a qualifying high deductible health plan, the HSA is one of the most powerful tax advantaged accounts available.

For 2025, the HSA limits are:

• $4,300 for self only coverage

• $8,550 for family coverage

• Plus a $1,000 catch up for age 55 or older

HSAs have a triple tax advantage that no other account can match:

1. Contributions are pre tax through payroll and usually avoid Social Security and Medicare tax.

2. Investments grow tax free while the money stays in the account.

3. Withdrawals for qualified medical expenses are tax free.

Most people treat HSAs like a spending account. They contribute just enough to cover this year's medical costs, then spend it down by December. But if you're a high earner who can afford to pay current medical expenses out of pocket, there's a better strategy.

The long horizon HSA approach:

Pay your current medical costs with after tax dollars from your checking account. Invest your HSA funds for future health care costs in retirement. Think of it as a dedicated health care bucket in your Life Driven Investing framework, growing tax free for 20 or 30 years.

Here's the math: a family in the 32% federal tax bracket that moves the full $8,550 into an HSA saves roughly $2,740 in federal income tax plus payroll tax. Invested at 7% annually, that $8,550 grows to over $32,000 in 20 years, all tax free if used for qualified medical expenses.

Year end actions:

• Check your year to date HSA contributions in your benefits portal.

• If you're behind the limit, ask HR whether you can increase contributions for the last payrolls of the year.

• If payroll has closed, you can still contribute directly to your HSA up to the tax filing deadline (though direct contributions won't save payroll tax).

• Open the investment menu inside your HSA and move funds out of cash into a diversified portfolio if you're treating this as a long term account.

🏥 The FSA Sweep: Avoid the Use It or Lose It Trap

Health FSAs and dependent care FSAs operate on a "use it or lose it" principle. If you don't spend the money by the plan year deadline, it's gone.

For 2025:

• Health FSA salary reduction limit: $3,300

• Maximum carryover (if your plan allows it): $660

• Dependent care FSA limit: $5,000 per household

Even if your plan offers a carryover feature, any amount above $660 will be forfeited at year end.

Your year end checklist:

1. Check your current FSA balance. Log into your benefits portal and see how much is left.

2. Book appointments you've been putting off. Dental cleanings, vision exams, orthodontia consultations. Get them scheduled before December 31.

3. Stock up on eligible over the counter items. Many FSAs now cover OTC medications, first aid supplies, and certain wellness products.

4. Submit outstanding claims. Don't let dollars be forfeited because you forgot to file paperwork for an expense from earlier in the year.

5. Right size next year's election. If you repeatedly end the year with large unspent balances, consider lowering your election for 2026. If you always run out early, increase it up to the limit.

Here's a quick example: if you leave $500 in an FSA unused every year, that's $500 of tax advantaged funds you've lost. Over five years, that's $2,500 you could have either used or redirected.

🚀 Mega Backdoor Roth: The Advanced Move

This section is for high earners who have already maxed their regular 401(k) deferrals, fully funded their HSAs, and are looking for the next level of tax optimization.

For 2025, the combined 401(k) limit (employee plus employer plus after tax contributions) is $70,000, or $77,500 if you're eligible for catch up contributions.

If your plan allows after tax contributions above the regular elective deferral limit and also allows in plan Roth conversion or in service rollover, you may be able to put additional after tax dollars into your 401(k) and quickly convert them to Roth.

Here's how it works:

Let's say you contribute the full $23,500 pre tax to your 401(k). Your employer adds a $10,000 match. That's $33,500 total, leaving $36,500 of unused space under the $70,000 combined limit.

If your plan permits, you could add some or all of that $36,500 as after tax contributions, then immediately convert it to Roth. The growth from that point forward is tax free, and future withdrawals are tax free under current Roth rules.

Plan requirements:

Not every 401(k) plan supports this. Your plan must explicitly allow:

1. After tax contributions beyond regular deferrals

2. In plan Roth conversions or in service rollovers of after tax funds

You'll need to check with your plan administrator or HR to see if your plan qualifies.

Where it fits:

This is an advanced move for those who are already maxing regular deferrals, fully funding HSAs, and maintaining adequate liquidity. If you meet those criteria, mega backdoor Roth can significantly expand your Roth balances beyond IRA limits, giving you more flexibility in retirement and in future tax diversification strategies.

🧠 Making Sense of Your Year End Benefits Sweep

Take Jennifer, a Director of Engineering earning $350,000. She assumed she was "maxing everything" because her 401(k) contribution percentage looked high. When we reviewed her accounts in early December, she was $3,200 short of the 401(k) limit because her percentage hadn't kept pace with salary increases. 

She'd never opened the investment menu inside her HSA, leaving $8,000 sitting in cash. And she had $600 in her health FSA about to expire.

She adjusted her final two paychecks to capture the remaining 401(k) space, moved her HSA into a diversified portfolio, and used her FSA balance for orthodontia consultations her kids needed anyway. Total time invested: 45 minutes. Tax savings captured: over $4,000.

Here's the simple truth: 401(k) limits and catch ups are higher for 2025, and many high earners are still short without realizing it. HSA and FSA decisions made through your benefits portal can quietly move thousands of dollars between your pocket and the IRS. And if your plan supports after tax contributions, mega backdoor Roth can be the next layer in building future tax flexibility.

Once you have a checklist and someone to walk it with you, this becomes a 90 minute exercise each year rather than a scramble.

If you suspect you haven't fully used this year's benefit space, we can help you find out before December 31. Reply to this email with "Benefits" and we'll send you a one page Benefit Sweep Checklist you can use with your HR portal or bring to a quick year end review.

Or book a short Wealth Clarity Chat focused on your benefit sweep. We'll review your 2025 contributions, decide whether mega backdoor Roth is worth exploring, and lock in a simple checklist you can run with us every December.

As always, I hope this helps you to Prioritize Your Version of a Rich Life.

Until next week!

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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