10 Ways to Reduce Taxes on Your Retirement Savings

The article highlights:

Here are some ways to help reduce taxes on your retirement savings:

Contributing to a 401k plan allows you to defer paying income tax on your retirement savings until the money is withdrawn.

• In 2023, most workers are eligible to defer taxes on up to $22,500 that’s deposited in a 401k, 403b, or Thrift Savings Plan (TSP).

• If your contributions are made through a payroll deduction, you’ll get a tax break almost immediately because less money will be withheld for income taxes.

• Contributing to a Roth 401k also has a contribution limit, but the tax treatment is different.

  • Rather than an immediate tax break on your contributions, you can potentially accumulate tax-free investment growth and take tax-free withdrawals after age 59½.

• Contributing to an IRA allows you to defer income tax on up to $6,500 in 2023.

  • You may not be able to claim a tax deduction on your IRA contribution if you also have a 401k at work and earn more than a certain amount.

• Contributing to a Roth IRA allows you to prepay income tax on up to $6,500 in 2023.

  • This strategy can help qualify you for tax-free investment growth and tax-free withdrawals in retirement from accounts that are at least 5 years old.

• Making catch-up contributions can be an additional tax break for workers age 50 and older.

  • Through contributions, you can defer taxes on an additional $7,500 in a 401k plan, meaning you can make a total tax-deductible contribution of as much as $30,000.

  • Beginning in 2025 people between ages 60 and 63 will have the option to make additional catch-up contributions.

  • IRAs also allow catch-up contributions for people age 50 and older up to $1,000 in 2023, allowing for a total IRA contribution of as much as $7,500.

• The retirement saver’s credit can be claimed on retirement account contributions of up to $2,000 for individuals ($4,000 for couples) and is worth between 10 percent and 50 percent of the amount contributed.

• Avoiding early withdrawal penalties from IRAs can help preserve more of your savings.

• Remember that income tax will be due on traditional retirement account distributions, including RMDs taken starting at age 73.

  • The penalty for failing to withdraw the correct amount is 25 percent of the amount that should have been distributed, in addition to the income tax cue.

• Delaying 401k withdrawals if you are still working can help reduce your income tax bill.

  • This strategy only applies if you are working into your 70s and don’t own more than five percent of the company sponsoring the plan.

  • However you will still need to take RMDs from IRAs and 401k accounts associated with previous jobs after age 73 to avoid the 25 percent penalty.

• Timing your retirement account withdrawals can have an impact on your tax bill.

  • Some retirees control their tax rate by spacing out withdrawals to avoid a big income tax bill in a single year and stay in a lower tax bracket.

  • Taking retirement account distributions in a low-earning year can help you minimize taxes on your retirement savings.