By Deborah A. Hresko, CPA
Planning for retirement is one of the most important financial decisions you can make. One critical aspect of retirement planning is having retirement accounts that are not taxable when distributions during retirement are taken. Most people are familiar with pre-tax contributions to retirement accounts, which are income taxable in retirement. If you are of the opinion that tax rates may be higher in the future, you could be creating a tax bomb when you are retired, and you need to withdraw money forcing you to pay more in taxes. In contrast, having money contributed after-tax sets up a situation where you would not pay tax on the monies withdrawn in retirement. This is known as a Roth IRA or Roth 401(k). The ability to customize how much money comes out of your taxable and non-taxable buckets provides the ability to control your tax rates in the future. This is one of the most powerful strategies that should be considered when planning for retirement. If you are currently retired, you have the ability to make conversions to a Roth IRA which could be an important strategy to help you make your retirement money last longer.
There are many options available, and it could be difficult to determine which account is best for your needs. The three most popular retirement accounts are the Traditional IRA, Roth IRA and 401(k).
Traditional IRA
Contribution limits for 2025 have not increased. They remain at $7,000 if you are under the age of 50 or $8,000 if you are 50 or older.
Your income, filing status and whether you (or your spouse) are covered by a retirement plan at work determine if your contributions may be tax-deductible.
For high-income earners who earn too much money to make tax deductible contributions, there is a strategy referred to as a Back-Door Roth IRA. This strategy allows you to make a contribution that can be converted to a Roth IRA.
Under current tax law, when you reach age 73, you must begin withdrawing a certain minimum amount from your account each year, known as the Required Minimum Distribution (RMD). Normally the IRA custodia or retirement plan administrator will calculate this amount.
Roth IRA
Contribution limits for 2025 have not increased. They remain at $7,000 if you are under the age of 50 or $8,000 if you are 50 or older.
If you have earned income, you can contribute to a Roth IRA, if you fall within the income limits. For 2025, the eligibility to contribute phases out at $150,000 to $165,000 for singles and heads of household filers and $236,000 to $246,000 for married couples filing jointly.
Unlike a Traditional IRA, withdrawals from a Roth IRA are not required until after the death of the account owner. However, beneficiaries of the Roth IRA are subject to the required minimum distribution rules.
401(k)
Contribution limits for 2025 have increased to $23,500. If you are 50 or older, you can make an additional catch-up contribution of $7,500. New for 2025, individuals between the ages of 60 and 63 have a super catch-up contribution limit of $11,250.
Some employers offer a Roth 401(k) option, where contributions are made with after-tax dollars.
Before making any financial decisions, it is advisable to seek the guidance of a qualified investment advisor or Certified Public Accountant (CPA).
Deborah A. Hresko, CPA, is a resident of Hernando County and holds CPA licenses in both the State of New York and Florida. With over 23 years of experience as a licensed professional, she has collaborated with her clients to analyze and address the tax implications of their retirement plan choices.
