How to Reduce Taxes on Retirement Savings
How to Reduce Taxes on Retirement Savings

With an appropriate strategy, you may be able to reduce taxes on your retirement savings. Although financial services professionals don’t give tax or legal advice, a U.S. News and World Report article, 10 Ways to Reduce Taxes on Your Retirement Savings has some good information.

Contribute to your 401(k)

Simply contributing to a 401(k) is one way you may be able to save on taxes during your retirement.

Putting money into a traditional 401(k) plan may allow you to defer paying income taxes on your retirement savings until you withdraw the money from your account. Many workers are eligible to defer taxes on as much as $22,500 this year if that money is deposited into a 401(k), 403(b), or the federal government’s Thrift Savings Plan.

And, if payments are made through a payroll deduction, you’ll see the tax break almost immediately because less money will be withheld for your income taxes.

Dedicate money to a Roth 401(k)

Contributing money to a Roth 401(k) is another way you may be able to reduce your tax burden during retirement. The contribution ceilings for Roth 401(k)s are identical to those for traditional 401(k)s, but the tax ramifications are different.

First, you don’t see an immediate tax break on Roth 401(k) contributions because they use after-tax money, which may then allow you to accumulate tax-free investment growth and utilize tax-free withdrawals after you’ve turned 59 ½ from an account you’ve held for a minimum of five years.

The investment growth in a Roth 401(k) isn’t taxed annually and you can make tax-free and penalty free withdrawals after age 59½ and once the account has been open for five years.

Consider an IRA

This year, folks with earned income who save for retirement via an individual retirement account, or IRA, may defer income tax on as much as $6,500. But you may not be able to claim a tax deduction on your IRA contribution if you also have a 401(k) account through your work and earn more than a certain threshold.

The IRA deduction vanishes for 401(k) account participants who earn between $73,000 and $83,000 this year. That number is between $116,000 and $136,000 for couples. If just one spouse has a 401(k) plan through their employer, the tax break sunsets if the couple’s income is between $218,000 and $228,000 this year.

Research Roth IRAs

By contributing to a Roth IRA, you may be able to prepay income tax on as much as $6,500 this year. Dedicating money to a Roth IRA may qualify you for tax-free investment growth and tax-free withdrawals in retirement accounts that you’ve held for a minimum of five years.

The flexibility to put money in a Roth IRA phases out once your adjusted gross income rises to between $138,000 and $153,000 for individuals and $218,000 and $228,000 for married couples. However, in some cases, folks who earn more than those figures may still be eligible to convert traditional retirement account money to a Roth.

There are upsides and downsides to both traditional accounts and Roth accounts, and those will be determined by your individual circumstances. When choosing between the traditional or Roth route, you should work with a financial services professional.

Catch-up contributions

Folks who are at least 50 qualify for an additional tax break if they make catch-up contributions to their retirement accounts. Older workers may defer taxes on an additional $7,500 in a 401(k) plan for a total tax-deductible contribution of up to $30,000 this year. That number for younger workers is $22,500. In 2025, folks who are between 60 and 63 will have the option to make even more catch-up contributions.

IRAs also permit catch-up contributions for folks who are at least 50 of as much as $1,000 this year. Older people can contribute a tax-deductible IRA contribution of up to $7,500 this year.


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