When it comes to retirement savings, minimizing taxes is key to maximizing your nest egg. Fortunately, there are several strategies to help you pay less tax and save more money for retirement.
Contributing to a retirement account, such as a 401(k) or individual retirement account, can help you reduce your tax bill. You may be able to defer paying income tax on your retirement savings until retirement. However, you may incur tax penalties if you don’t use your retirement accounts correctly.
Here are 10 ways to minimize taxes on your retirement savings.
— Contribute to a 401(k).
— Contribute to a Roth 401(k).
— Contribute to an IRA.
— Contribute to a Roth IRA.
— Make catch-up contributions.
— Take advantage of the saver’s credit.
— Avoid the early withdrawal penalty.
— Remember required minimum distributions.
— Delay 401(k) withdrawals if you are still working.
— Time your retirement account withdrawals.
Contribute to a 401(k)
Contributing to a traditional 401(k) plan allows you to defer paying income tax on your retirement savings until the money is withdrawn from the account. Most workers are eligible to defer taxes on up to $23,500 in 2025, an increase of $500 from 2024, when deposited in a 401(k), 403(b) or the federal government’s Thrift Savings Plan. If these contributions are made via a payroll deduction, you will get the tax break almost immediately because less money will be withheld for income taxes.
[READ: Retirement Accounts You Should Consider.]
Contribute to a Roth 401(k)
The contribution limits for Roth 401(k)s are the same as for traditional 401(k)s, but the tax treatment differs. You don’t get an immediate tax break on your Roth 401(k) contributions. Roth 401(k)s allow you to contribute after-tax dollars, but then you can accumulate tax-free investment growth and take tax-free withdrawals after age 59 1/2 from an account at least five years old. The investment earnings within the account are not taxed each year, and you can withdraw the balance tax-free during retirement.
Contribute to an IRA
People with earned income who save for retirement in an IRA can defer income tax on up to $7,000 in 2025, the same as in 2024. However, you may not be able to claim a tax deduction for your IRA contribution if you also have a 401(k) account at work and earn more than a certain amount.
The IRA tax deduction is phased out for 401(k) account participants who earn between $79,000 and $89,000 in 2025, or $126,000 and $146,000 for couples. If only one spouse has access to a 401(k) plan at work, the tax break is phased out if the couple’s income is $236,000 to $246,000 in 2025.
Contribute to a Roth IRA
Taxpayers can prepay income tax on up to $7,000 in 2025 using a Roth IRA. Contributing to a Roth IRA can qualify you for tax-free investment growth and tax-free withdrawals in retirement from accounts that are at least five years old.
The ability to make Roth IRA contributions is phased out if your adjusted gross income is between $150,000 and $165,000 as an individual and $236,000 to $246,000 as a married couple. However, people who earn more may still be eligible to convert traditional retirement account assets to a Roth.
“In many cases, the Roth IRA is one of the most flexible and tax-advantaged assets a retiree can possess,” says Ashley Weeks, vice president and wealth strategist at TD Bank, based in Greenville, South Carolina.
He adds that the two greatest benefits of a Roth IRA are the potential for tax-free investment earnings and exclusion from required minimum distributions, known as RMDs. “If the rules are followed, all of the earnings and investment growth can be withdrawn from a Roth IRA free of income tax,” Weeks says.
[READ: Deciding Between a Roth vs. Traditional IRA.]
Make Catch-Up Contributions
Workers age 50 and older are eligible for an additional tax break if they make catch-up contributions to their retirement accounts. Older employees can defer taxes on an additional $7,500 in a 401(k) plan for a total tax-deductible contribution of as much as $31,000 in 2025, compared with $23,500 for younger workers. In 2025, those between ages 60 and 63 can make additional catch-up contributions.
IRAs also allow catch-up contributions for those age 50 and older of up to $1,000 in 2025 for a total of $8,000.
Take Advantage of the Saver’s Credit
Retirement savers who earned up to $39,500 for individuals, $59,250 for heads of household and $79,000 for married couples in 2025 and contributed to a 401(k) or IRA are eligible for the saver’s credit.
The saver’s credit can be claimed on retirement account contributions of up to $2,000 for individuals or $4,000 for couples. It is worth between 10% and 50% of the amount contributed, with bigger credits going to lower-income savers. The credit can be claimed in addition to the tax deduction for a traditional retirement account contribution.
[READ: How to Build a Balanced Retirement Portfolio]
Avoid the Early Withdrawal Penalty
IRA withdrawals before age 59 1/2 and 401(k) withdrawals before age 55 generally result in a 10% tax penalty. However, there are a variety of ways to avoid the early withdrawal penalty. You may not have to pay the penalty for an early withdrawal if you use the money for several specific purchases, such as an IRA distribution for college costs, a first home purchase, abnormally high health care costs or health insurance after a layoff.
You may also be able to withdraw funds you contributed to a Roth IRA, but not the earnings, without triggering the early withdrawal penalty if the Roth IRA is at least five years old.
Remember Required Minimum Distributions
Withdrawals from IRAs and most 401(k)s become required after age 73. Income tax will be due on each traditional retirement account distribution.
The penalty for failing to withdraw the correct amount is 25% of the amount that should have been distributed, in addition to the income tax due. The penalty could be reduced to 10% if you quickly correct the error.
Your first required minimum distribution is due by April 1 of the year after you turn 73, but all subsequent distributions must be taken by Dec. 31 each year to avoid the penalty. The age to start required minimum distributions will increase to 75 beginning in 2033.
Delay 401(k) Withdrawals If You Are Still Working
If you remain employed into your 70s or later and don’t own 5% or more of the company sponsoring the retirement plan, some 401(k) plans will allow you to delay withdrawals from your current 401(k) account until you retire. However, you will still need to take required minimum distributions from IRAs and 401(k) accounts associated with previous jobs after age 73 — or 75 beginning in 2033 — to avoid the 25% tax penalty.
Time Your Retirement Account Withdrawals
The timing of your retirement account withdrawals can have an effect on your taxes, says Sean Lovison, a certified financial planner and a certified public accountant who owns Purpose Built Financial Services in Moorestown, New Jersey.
“If you are in retirement and have a mix of pre- and post-tax assets, smart withdrawal strategies from various accounts can significantly minimize tax liabilities,” Lovison says. “Balancing withdrawals from tax-deferred and tax-free accounts can help maintain a lower tax bracket in retirement.”
For instance, during your 60s, you can take penalty-free withdrawals from your retirement accounts, but you are not yet required to take distributions each year. Taking retirement account distributions in a low-earning year can help you to minimize taxes on your retirement savings.
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10 Ways to Reduce Taxes on Your Retirement Savings originally appeared on usnews.com
Update 12/23/24: This story was previously published at an earlier date and has been updated with new information.
