Ways to Reduce Taxes on Your Retirement Savings

Here’s how to minimize taxes on your retirement savings.

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to a traditional 401(k) plan allows you to defer paying income tax on your retirement savings until the money is withdrawn from the account.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 $20,500 in 2022 that is 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.

Roth 401(k)

The contribution limits for Roth 401(k)s are the same as for traditional 401(k)s, but the tax treatment is different. 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 that is at least five years old. The investment earnings within the account are not taxed each year, and you can withdraw the balance tax-free in retirement.

IRA

People with earned income who save for retirement in an individual retirement account can defer income tax on up to $6,000 in 2022. 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 $68,000 and $78,000 in 2022 ($109,000 and $129,000 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 $204,000 to $214,000 in 2022.

Roth IRA

Taxpayers can prepay income tax on up to $6,000 in 2022 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 at least five years old. However, the ability to make Roth IRA contributions is phased out if your adjusted gross income is between $129,000 and $144,000 as an individual and $204,000 to $214,000 as a married couple. However, people who earn more may still be eligible to convert traditional retirement account assets to a Roth.

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