February 28, 2025

Planning for retirement requires not only smart saving strategies but also an understanding of the tax implications that come with different types of retirement accounts. To help navigate the complexities, here’s a breakdown of key considerations for contributions, conversions, withdrawals, and charitable distributions related to 401(k)s, IRAs, and other retirement funds.

Contributions: Understanding Limits and Eligibility

Retirement accounts typically have contribution limits, income eligibility requirements, and tax advantages based on the account type.

  • Traditional & Roth IRAs: Contribution limits for 2024 and 2025 are $7,000, with an additional $1,000 allowed for those 50 and older. Roth IRA contribution eligibility phases out based on income—beginning at $146,000 for single filers and $230,000 for married joint filers in 2024.
  • 401(k)s: Employees can contribute up to $23,500 in 2025, with a $7,500 catch-up for those 50 and older. For those 60-63, an extra $3,750 contribution is allowed.
  • Deadlines: Traditional and Roth IRA contributions can be made until April 15 of the following year.

Conversions: Roth IRA Considerations

Converting a traditional IRA into a Roth IRA may be beneficial for tax-free withdrawals in the future but requires paying taxes on the converted amount upfront.

  • Backdoor Roth IRA Conversions: A strategic option for certain high earners who exceed Roth income limits.
  • Mega-Roth 401(k) Conversions: Some employer plans allow for after-tax contributions to be converted in-plan to their Roth 401(k)s, enabling tax-free growth.

Withdrawals: Required Minimum Distributions (RMDs) and Penalties

  • RMDs: Required withdrawals start at age 73. Roth IRAs do not have RMDs for the original owner.
  • Early Withdrawals: Generally, withdrawals before 59½ incur a 10% penalty, except for specific exceptions like medical or educational expenses.
  • Inherited IRAs: Rules differ for heirs, with most required to withdraw funds within 10 years unless they qualify for an exception.

Charitable Distributions: Tax-Advantaged Giving

  • Qualified Charitable Distributions (QCDs): IRA owners 70½ and older can donate up to $108,000 in 2025 directly from their IRA to a charity, satisfying RMD requirements tax-free.

Understanding these tax rules may help retirees maximize investments, minimize tax liabilities, and make strategic decisions about their financial future. For personalized guidance, let’s talk today!

https://www.wsj.com/personal-finance/retirement/retirement-taxes-contributions-withdrawals-guide-bc308053?mod=personal-finance_lead_pos4