There are numerous tax-reduction strategies, but perhaps none is as easy and accessible as saving for retirement.
“Would you rather the IRS have your money or would you rather save for retirement?” asks Nick Bour, founder and CEO of Inspire Wealth in Brighton, Michigan.
Workers can reduce their tax burden now or in the future by using the right accounts. However, taxes cannot be eliminated completely.
“You’re not going to get away from paying taxes,” says Nayan Lapsiwala, director in wealth management and partner with the Silicon Valley office of financial firm Aspiriant. “It’s just a matter of when.”
Deciding when to save on taxes is the first of several steps to lower your tax bill by saving for retirement. Here’s what you should do:
— Decide whether to save on taxes now or later.
— Choose your savings vehicle.
— Max out your annual contributions.
— Open a health savings account.
— Claim an additional tax credit.
— Make adjustments as you near retirement.
Decide Whether To Save on Taxes Now or Later
Many tax-advantaged retirement accounts come in two versions:
— Traditional. A traditional account provides an immediate tax deduction for eligible contributions. Money grows tax-deferred and withdrawals are subject to regular income tax in retirement. Once an account holder reaches a certain age, currently 73, the government mandates that annual required minimum distributions be withdrawn.
— Roth. Roth accounts are funded with after-tax dollars, meaning you won’t see any immediate tax savings when you make contributions. However, there is no tax on withdrawals in retirement. There are also no RMDs with Roth accounts.
Several factors can influence whether someone is better off saving money on taxes now with a traditional account or later using a Roth account.
“Most often, it’s a function of what tax bracket they’re in,” says Russell Hackmann, president of Boston-based Hackmann Wealth Partners and author of “Wall Street is Not Your Friend.”
Those who are in their high-income years — and thus a higher tax bracket — may want to take a tax deduction now. Meanwhile, those with a low income may find it better to pay taxes now rather than in the future. Younger workers should also consider that their investments have decades to grow, and all the gains will be tax-free with a Roth account.
“I feel it’s more important to save on taxes when you retire,” says David Silversmith, senior tax manager with Eisner Advisory Group in New York City. That’s because people are often trying to live on less income during their retirement years.
Plus, there is no guarantee that someone will be in a lower tax bracket in retirement. “Tax rates (haven’t) been this low for a long time,” Hackmann says of the current brackets.
Choose Your Savings Vehicle
You’ll need to save in a government-approved retirement account to get a tax advantage. These broadly fall into one of two categories:
— Employer-sponsored plans
— Individual retirement accounts
The most common employer-sponsored plan is a 401(k) account, but there are also 403(b)s, 457(b)s and similarly structured workplace plans. In 2025, workers younger than age 50 can save up to $23,500 in a traditional or Roth account. Those older than age 50 can save $31,000, and the limit may be even higher for those ages 60 to 63.
Individual retirement accounts, commonly known as IRAs, have a much lower contribution limit. In 2025, those younger than 50 can save $7,000 in a traditional or Roth IRA, while those older than 50 can save $8,000.
“(The) 401k is obviously the biggest and most powerful (compared to IRAs),” says Scott Schuebel, CEO and managing partner with Statera Advisors in Hunt Valley, Maryland.
There is one exception, however. “If you’re self-employed, the SEP IRA can give you a big advantage,” Silversmith says.
SEP IRAs have a 2025 contribution limit of 25% of a person’s income or $70,000, whichever is less. These retirement accounts don’t have a Roth version and are available to self-employed workers and certain small business owners.
[Read: What the Rothification of Retirement Accounts Means for You]
Max Out Your Annual Contributions
Investment gains will compound over time, helping to boost your retirement account balance. However, the more you have deposited into your account, the more your gains will grow — and the more taxes you’ll save.
“We believe people should save the maximum they can,” Schuebel says.
Many workplaces will match a portion of their employees’ contributions to 401(k) or other employer-sponsored plans. If you can’t contribute to the annual limits listed above, at least put enough into these accounts to claim the full match.
[Read: How to Maximize Your 401(k) Match.]
Open a Health Savings Account
Health savings accounts are often overlooked as a retirement savings vehicle. These accounts allow people with qualifying high-deductible health plans to put money aside to pay for health care expenses.
There is an immediate tax deduction for contributions up to an annual limit, and withdrawals are tax-free if used for qualifying medical expenses. Since money in the account can be invested and rolls over year after year, workers can save in an HSA now and use the funds in the future.
That’s something some of Bour’s clients are planning to do. In addition to paying for medical expenses, an HSA can be used for Medicare premiums and long-term care insurance premiums.
Using funds from an HSA for nonqualified expenses makes a withdrawal subject to income tax and a 20% penalty. However, once you reach age 65, the penalty disappears, and money from an HSA can be withdrawn for any reason with only income tax due — the same as with any traditional IRA or 401(k) account.
Claim an Additional Tax Credit
In addition to the tax benefits outlined above, the government provides a retirement savings contribution credit worth as much as $1,000 for single tax filers and $2,000 for married couples filing jointly.
However, not everyone can claim this nonrefundable credit, known as the saver’s credit. It is only available to low- and moderate-income workers. The credit is offered on a sliding scale and, for 2025, only single taxpayers earning $39,500 or less will qualify, while the income limit is $79,000 for married couples filing jointly. The income limits to qualify for the full credit are $23,750 and $47,500, respectively.
[What Is the Average Retirement Savings Balance by Age?]
Make Adjustments as You Near Retirement
If you are serious about reducing your tax bill, don’t put your retirement savings on autopilot. Having the right mix of Roth and traditional accounts can minimize the chances of being hit with a big tax bill later in life.
“People always think they would be in a lower tax bracket (in retirement),” Bour says.
However, that is not always the case. “If you have a lot of money in your pretax account, guess what? You’ll have a lot for your RMD,” Lapsiwala says. That RMD is taxable income that could come with a big bill and bump you into a higher tax bracket.
“Your 60s can be a good time to get ahead of that tax situation,” Hackmann suggests.
That may involve converting money from traditional to Roth accounts. Doing so will incur a tax bill, but with a conversion, you can control exactly how much and when you pay it.
“We convert in micro pieces,” Schuebel says, noting that there is no minimum on how much you convert at a time.
As you near retirement, consulting with a tax professional about where your money is stored and how it may be taxed can be a smart move to avoid future surprises at tax time.
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How to Reduce Your Tax Bill by Saving for Retirement originally appeared on usnews.com
Update 06/03/25: This story was published at an earlier date and has been updated with new information.
