How to Reduce Your Lifetime Tax Bill With a Roth IRA

Reducing your lifetime tax bill is a smart financial strategy, and a Roth individual retirement account can be a key part of that.

Growth and retirement withdrawals from a Roth IRA are tax-free, allowing investors to benefit from compounding over time. A longer time horizon can be an enormous benefit to younger workers who make a habit of regularly saving money for retirement.

“Since many individuals begin their careers in lower tax brackets and contributions to Roth IRAs are made with after-tax dollars, contributing to a Roth account early in your career allows you to avoid the higher tax rates that might apply in your peak earning years or in retirement,” said Nancy Gates, financial wellness coach at Boldin in Mill Valley, California, in an email.

[READ: Your Guide to Retirement Planning.]

2025 Roth Income and Contribution Limits

There are income and contribution limits for those who plan on contributing to a Roth. For tax year 2025, those limits are:

— Savers under 50 may contribute $7,000.

— Those 50 and older can contribute an extra $1,000 as a catch-up.

— Single filers can contribute the full $7,000 if earning less than $150,000.

— Married filing jointly can contribute the full $7,000 if earning less than $236,000.

— Contributions phase out above these income thresholds.

Starting Tax-Free Growth Early

Taxpayers usually try to minimize their yearly payments to the Internal Revenue Service, but that may be shortsighted.

“When it comes to taxes, the real game isn’t about paying the least this year; it’s about minimizing your taxes over your lifetime,” said Zach Tekamp, wealth advisor and managing director at Heritage Wealth Management Group in Norfolk, Virginia, in an email.

A better approach, Tekamp said, is to view taxes as an evolving, multiyear process that requires different strategies depending on income and marginal tax brackets.

“Contributing to your Roth investment vehicles, whether through Roth IRA contributions, Roth 401(k) contributions or conversions, gives you significantly more control over managing your taxes later in life,” he said.

Most people think their tax rates will be highest during their working years, but it’s not unusual to see the highest brackets of their lives in retirement. That’s due to a lack of a strategic long-term tax plan. “Often forgotten is their taxable income generated from pensions, Social Security benefits and required minimum distributions,” he said.

[READ: How Roth IRA Taxes Work]

Reducing Your Future Tax Bill

You might wonder what percentage of your retirement contributions should go to a Roth IRA rather than a traditional IRA.

Choosing Roth contributions means paying taxes upfront, but you benefit from tax-free growth.

For younger savers in lower tax brackets, prioritizing Roth contributions is often smart. However, as income rises, deciding between Roth and traditional contributions requires careful planning to maximize tax benefits.

“The decision about pretax versus after-tax contributions is strategic and more difficult than many people realize,” said Sean Mason, investment advisor representative at Fresno Financial Advisors in Fresno, California, in an email.

Paying taxes upfront and forfeiting potential investment returns on that amount in exchange for future tax-free growth affects portfolio returns over time.

“We advocate to our clients to teach their younger children and grandchildren to take advantage of their lower-income years when their taxes are low by directing the majority of their contributions to a Roth account,” Mason said.

As income increases, he added, a saver’s investment strategy requires more advanced calculations to determine the most beneficial ratio of Roth to traditional tax-deferred contributions.

Strategies for Higher Earners

High-income earners can still incorporate Roth IRAs into their retirement plans using strategies such as a backdoor Roth.

“This involves making a nondeductible contribution to a traditional IRA and then converting those funds to a Roth IRA,” said Jake Falcon, CEO at Falcon Wealth Advisors in Mission Woods, Kansas, in an email.

This strategy allows high earners to take advantage of the tax-free growth and withdrawals offered by Roth IRAs, even if they exceed the income limits for direct contributions.

“It’s important to note that certain rules apply, and if someone opens a traditional IRA with pretax dollars already in the account, they may need to convert those dollars pro rata,” Falcon said. “This strategy is advanced and should be done under the guidance of a tax advisor.”

[READ: Retirement Accounts You Should Consider.]

IRAs for Tax Management

Having a Roth and traditional IRA can help retirees manage their tax brackets and retirement withdrawals more effectively.

“By strategically withdrawing from traditional IRAs up to the top of a lower tax bracket and then using Roth IRA withdrawals to cover additional expenses, retirees can minimize their overall tax liability,” Falcon said.

This approach provides flexibility and helps optimize tax efficiency in retirement, he added.

“We often refer to this as tax diversification. Since no one knows what the tax code will be 10, 20 or 30 years from now, having different accounts that are taxed differently could set up a retiree to roll with changes that may come their way,” he said.

More from U.S. News

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Ask a Financial Pro: What Is the Best Time of Year to Retire for Tax Purposes?

The Best Ways to Boost Retirement Savings After Age 50

How to Reduce Your Lifetime Tax Bill With a Roth IRA originally appeared on usnews.com

Update 02/03/25: This story was published at an earlier date and has been updated with new information.

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