How to Reduce Your Tax Bill by Saving for Retirement

Lower your tax bill.

Saving for retirement can qualify you for several different types of tax breaks. Some retirement accounts allow you to defer paying income tax on your retirement savings, while others help you avoid paying tax on any of the investment gains you accrue. You could additionally be eligible for the saver’s tax credit for your retirement account contributions. Here’s how to lower your tax bill while building wealth for the future.

Contribute to an IRA.

You can defer paying income tax on up to $6,500 that you deposit in an individual retirement account. A worker in the 24% tax bracket who maxes out this account will reduce his federal income tax bill by $1,560. Income tax won’t apply until the money is withdrawn from the account. IRA contributions aren’t due until your tax-filing deadline in April, so you can plug in an IRA contribution while calculating your taxes to see exactly how much you can save if you shift some cash into an IRA.

Increase your 401(k) withholding.

Many 401(k) plans allow you to log in and increase your 401(k) withholding, which will qualify you for a bigger tax break. This type of workplace retirement account allows employees to defer paying income tax on contributions of up to $22,500 in 2023. A worker in the 24% tax bracket who contributes the maximum amount to a 401(k) would save $5,400 in taxes. Those who are in higher tax brackets have the most to gain by contributing to a 401(k) plan. An employee in the 37% tax bracket who maxes out a 401(k) plan could reduce his income tax bill by $8,325. Married couples who are both eligible for a 401(k) plan at work can contribute to a 401(k) in each of their names for double the tax savings.

Make catch-up contributions.

Once you turn 50, you qualify to make catch-up contributions to 401(k)s and IRAs. Workers age 50 and older are eligible to defer taxes on an additional $7,500 in their 401(k) plans in 2023 for a total contribution of up to $30,000. A 55-year-old worker in the 24% tax bracket who maxes out a 401(k) plan would save $7,200 in taxes, $1,800 more than younger workers. Older workers can also contribute up to $7,500 to an IRA, $1,000 more than younger savers.

Open a spousal IRA.

While couples can’t open a joint IRA, you can open an IRA for each spouse and claim double the tax deduction. Couples can defer paying income tax on up to $13,000 if they max out two traditional IRAs, and that jumps to $15,000 if both members of the couple are age 50 or older. You can save in an IRA in each spouse’s name even if one member of the couple did not work.

Contribute to a 401(k) and IRA in the same year.

Some workers are eligible to contribute to a 401(k) and an IRA in the same year, but high earners are prohibited from claiming tax deductions on contributions to both types of accounts. Participants in 401(k)s can claim a tax deduction for an IRA contribution if they earn less than $83,000 ($136,000 for couples), and the deduction is phased out for those earning more than $73,000 ($116,000 for couples) in 2023. If only one spouse is eligible for a 401(k) plan, the IRA tax deduction is phased out if the couple’s income is between $218,000 and $228,000.

Save in a Roth IRA.

Contributions to a Roth IRA won’t get you an immediate tax break. However, the investment earnings aren’t taxed while the money is in the account. And if you take withdrawals after age 59 1/2 from an account that is at least five years old, you won’t ever have to pay tax on the investment growth. The ability to make Roth IRA contributions is phased out for workers who earn between $138,000 and $153,000 as an individual and $218,000 to $228,000 as a married couple in 2023.

Consider a Roth 401(k).

Making an after-tax contribution to a Roth 401(k) account could allow you to avoid paying tax on your investment earnings if you delay withdrawals until retirement. Distributions from Roth 401(k)s in retirement are often tax-free. Roth 401(k)s have a much higher contribution limit than Roth IRAs, and qualifying employees can contribute as much as $22,500 in 2023, or $30,000 at age 50 or older. You may be eligible for a 401(k) match on your Roth 401(k) deposits, but the employer contributions will be placed in a traditional tax-deferred retirement account, not the Roth account.

Initiate an IRA conversion.

You can convert your traditional IRA balance to a Roth IRA if you pay income tax on the amount you convert. You might be able to reduce your lifetime tax bill if you complete the conversion in a year you have unusually low earnings. For example, if you expect to be in the 24% tax bracket in retirement, but pay a 12% tax rate on the converted amount, you will have decreased the tax due on your retirement savings.

Save your tax refund for retirement.

You can use your tax refund to fund an IRA. Part or all of your tax refund can be directly deposited into an IRA using IRS Form 8888. You can elect to use your refund to reduce next year’s tax bill or even your current tax bill if you meet the IRA contribution deadline. If you contribute to an IRA between January and April, you will need to specify whether the amount should be applied to the previous tax year or the current calendar year.

Claim the saver’s credit.

Workers with small salaries who manage to save for retirement may be able to claim a tax credit in addition to the tax deduction for saving in a traditional 401(k) or IRA. Retirement savers who earn less than $36,500 as an individual, $54,750 as a head of household or $73,000 as part of a married couple are eligible for the saver’s credit in 2023. The credit is worth between 10% and 50% of retirement account contributions up to $2,000 for individuals and $4,000 for couples, with the biggest credit going to savers with the lowest incomes. The saver’s credit can be worth as much as $1,000 for individuals and $2,000 for married couples.

Take a qualified charitable distribution.

Retirees are required to take distributions from traditional 401(k)s and IRAs each year after age 72 and pay income tax on each withdrawal. However, you can avoid income tax on an IRA withdrawal if you make a qualified charitable distribution. IRA owners age 70 1/2 and older can transfer up to $100,000 to an eligible charity without paying income tax on the transaction, and the donation also satisfies your minimum distribution requirement. Couples who file a joint tax return can avoid paying income tax on up to $200,000 in IRA charitable donations. But you don’t need to make a large donation to qualify for the tax break. Even donating $100 directly from your IRA to a charity would save you $24 in taxes if you are in the 24% tax bracket.

How to Reduce Your Tax Bill by Saving for Retirement:

— Contribute to an IRA.

— Increase your 401(k) withholding.

— Make catch-up contributions.

— Open a spousal IRA.

— Contribute to a 401(k) and IRA in the same year.

— Save in a Roth IRA.

— Consider a Roth 401(k).

— Initiate an IRA conversion.

— Save your tax refund for retirement.

— Claim the saver’s credit.

— Take a qualified charitable distribution.

More from U.S. News

New 401(k) Contribution Limits for 2023

IRA Contribution Limits for 2023

How Much Should You Contribute to a 401(k)?

How to Reduce Your Tax Bill by Saving for Retirement originally appeared on

Update 12/07/22: This story was published at an earlier date and has been updated with new information.

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