Retirement Planning and Tax Optimization Retirement Planning and Tax Optimization
Retirement Planning and Tax Optimization'Do what's right for you': What readers say about taking Social Security at 62
When to start taking Social Security is a contentious topic, to say the least.My recent column about the surging advice from TikTok and YouTube “finfluencers” to take Social Security at 62 — the earliest age allowed — and then invest those payments each month in stocks resonated with readers.Thousands of you weighed in about what you did or plan to do, including whether you’re slowly fading into retirement by claiming your Social Security while still earning income from a job.A quick recap of the rulesYou can take Social Security as early as age 62, but your benefit can be slashed as much as 30% from what it would have been at your full retirement age (FRA). For anyone born in 1960 or later, your full retirement age is 67.If you delay benefits from your full retirement age until age 70, you earn delayed retirement credits. Those come to roughly an 8% increase for each year until you hit 70, when the credits stop accruing.If you continue to work after claiming Social Security benefits after age 62 and before your full retirement age, the Social Security Administration (SSA) will temporarily withhold a portion of your benefits for earnings over a certain threshold, roughly $23,000.In the year you reach full retirement age, that limit increases threefold; and in the month you hit full retirement age, the annual earnings test ends. From that point on, you can earn without limitations, and while you don’t get the amount you forfeited previously in a lump sum, your monthly benefit is adjusted upward so you will recoup all the benefits that were withheld. This calculator on the SSA website walks you through the calculation.Read more:What is the retirement age for Social Security, 401(k), and IRA withdrawals?Sign up for the Mind Your Money weekly newsletterBy subscribing, you are agreeing to Yahoo's Terms and Privacy Policy SubscribeThe do or don’t debateMost financial advisers and retirement experts contend that for many people, delaying tapping into their benefit until age 70, if they can afford to, will deliver a larger monthly check for the rest of their lives.The argument for taking it at 62 is that by investing your benefits in the market, your investment returns will make up for a reduced check.The following is an edited sampler of some of those comments — and my take on them. Feel free to weigh in, of course, in the comments section at the end of this sequel.Let’s get started:It’s all a personal decision with no right or wrong answer. Why I took it when I did is irrelevant to the next person. Somebody's justification and analysis on waiting to 70 or taking at 62 or somewhere in between is their reason. It doesn't necessarily hold true for anybody else. So do what’s right for you.Another reader chimed in:
Retirement Planning and Tax OptimizationTraditional IRA vs. Roth IRA: How to pick the right one
You have two options for individual retirement accounts (IRAs): traditional or Roth. Which one can help you secure the retirement you want? Find out now with this breakdown of how traditional and Roth IRAs differ. We'll also cover the factors to consider when choosing between these retirement account types.Learn more:What is an IRA and how does it work?Understanding IRAsTraditional and Roth IRAs have powerful tax advantages that help you save more for retirement. Both offer tax-deferred earnings. This means you do not pay taxes annually on capital gains, dividends, and interest earned within the account.Tax-deferred growth speeds up wealth production by sparing you an annual tax expense on the money earned. You can leave your funds invested and growing rather than taking withdrawals to pay Uncle Sam.Traditional and Roth accounts also have other tax benefits:Traditional IRAsoffer tax-free contributions under certain conditions. Tax-free contributions reduce your taxable income and, in turn, your taxes. Saving is cheaper because lower taxes offset a portion of your contribution. You will pay taxes later when you withdraw funds from your account in retirement.Roth IRAcontributions are after-tax, meaning they are not deductible. They do not affect your current income or taxes in the current year. Qualified Roth withdrawals in retirement are tax-free.Factors to considerThe relevant differences between traditional and Roth IRAs go beyond the timing of certain tax benefits. They also have different restrictions on contributions and withdrawals. To evaluate which account type suits your situation better, consider your tax outlook, current income, 401(k) access, and liquidity needs.Tax outlookThe traditional IRA provides up-front tax benefits in the form of tax-free contributions. This is an advantage when you are in a higher tax bracket today versus your expected tax bracket in retirement. You can use a traditional IRA to forgo higher taxes today and pay lower taxes later.With a Roth IRA, you pay taxes now on your contributions and enjoy tax-free withdrawals in retirement. Mathematically, this saves you money if you are in a higher tax bracket in your senior years. Tax-free income in retirement is also easier to budget and may contribute to lower Medicare premiums.Current incomeThe IRS has eligibility requirements for Roth IRA contributions. The 2025 annual contribution limit is $7,000, or $8,000 if you are over 50. In 2026, you can contribute up to $7,500, or $8,600 after your 50th birthday.These are not per-account limits. They apply to all IRAs in your name. You can split your contributions between a traditional and Roth account — but only to the extent you are eligible for Roth contributions.Annual income limits govern eligibility for Roth IRA contributions. The IRS defines income here as modified adjusted gross income.Rules for single taxpayers include:Single taxpayers earning less than $153,000 annually can make a full Roth IRA contribution.Single taxpayers earning $153,000 to $168,000 can make a partial Roth IRA contribution. Allowed amounts are calculated based on income and are less than the $7,500 limit or $8,600 for those over 50.Single taxpayers earning $168,000 or more are not eligible to make Roth IRA contributions.Roth IRA contribution rules for married taxpayers filing jointly include:Couples earning less than $153,000 can make a full Roth IRA contribution for the year.Couples earning $242,000 to $252,000 can make a partial Roth IRA contribution.Couples earning more than $252,000 cannot make Roth IRA contributions.Learn more:These are the traditional IRA and Roth IRA limits in 2026Access to a 401(k)Your income does not limit how much you can contribute to a traditional IRA. However, it may affect the deductibility of your IRA contributions if you also have access to a workplace 401(k). The IRS sets separate income limits for single taxpayers and those who are married and filing jointly. The rules for couples vary depending on whether the spouse making the contribution has a 401(k).Singles earning $81,000 or less annually can fully deduct their traditional IRA contributions.Singles earning $81,000 to $91,000 annually can partially deduct traditional IRA contributions.Singles earning $91,000 or more annually cannot deduct traditional IRA contributions.Learn more:What is a 401(k)? A guide to the rules and how it works.The limits for married taxpayers filing jointly who also have a 401(k) are:Couples earning $129,000 or less annually can fully deduct traditional IRA contributions.Couples earning $129,000 to $149,000 annually can partially deduct traditional IRA contributions.Couples earning $149,000 or more annually cannot deduct traditional IRA contributions.Non-deductible traditional IRA contributions are less appealing than non-deductible Roth IRA contributions because traditional IRA withdrawals in retirement are taxable, while qualified Roth withdrawals are tax-free. But, if your income prohibits you from Roth contributions, non-deductible traditional contributions may still be worthwhile because of the tax-deferred growth.Learn more:401(k) vs. IRA: The differences and how to choose which is right for youLiquidity needsGenerally, you should not withdraw funds from any IRA before age 59 ½. Doing so can prompt penalties and fees from the IRS. However, Roth IRAs have more relaxed withdrawal rules than traditional IRAs. For this reason, Roth IRAs are a better source of emergency liquidity than traditional IRAs.What's different about Roth accounts is that you can withdraw your contributions at any time without restriction or penalty. The IRS only restricts the withdrawal ofearningsfrom the account. The distinction between the contributions and the earnings exists because their tax statuses differ. As noted, you make Roth contributions with after-tax funds, but the earnings are tax-deferred.Traditional IRAs don't have that distinction. Early withdrawal of contributions or earnings in a traditional account triggers taxes and penalties.The right retirement accountSome savers rely on their tax outlook to choose between traditional and Roth IRA contributions. If they expect a lower tax bracket in retirement, they'll put more funds in a traditional IRA and vice versa. Those with an uncertain tax outlook may opt to diversify and contribute to both account types, assuming they are eligible. Still, others may prefer the convenience of tax-free retirement income from a Roth IRA — even if it means paying more taxes now.How you choose to tackle this decision is up to you. More important is your commitment to regular, ongoing retirement contributions. Focus on establishing a sizable nest egg in whatever account makes sense now. Managing some tax consequences later is a good problem to have if it confirms you've saved enough for a comfortable retirement.Learn more:Gold IRA: Benefits, risks, and how it differs from a traditional IRATim Manniedited this article.
Retirement Planning and Tax OptimizationTaxes on traditional and Roth IRA and 401(k) withdrawals: What you should know
Retirement plans such as 401(k)s and IRAs are powerhouse savings accounts, giving you a tax break either when you contribute to the account or when you withdraw your money — plus taxes are deferred while the money grows.But if you dip into your retirement savings early — which generally means anytime before you reach age 59 ½ — you may be required to pay tax on those distributions, plus a possible penalty of 10 percent or more of your withdrawal amount.The biggest factor dictating the taxes you pay, besides your age when you take withdrawals, is whether you have a traditional or Roth account. That’s because you’ll typically be taxed on withdrawals from traditional accounts, whereas distributions from Roth IRAs and Roth 401(k)s are tax-free — unless you fail to abide by specific rules.Understanding how you’ll be taxed on your retirement money is important, particularly if you have a mix of traditional and Roth retirement accounts. Below we dive into how the most common types of retirement accounts — traditional and Roth IRAs, and traditional and Roth 401(k)s — are taxed, both on early withdrawals as well as distributions once you’re in retirement.Traditional IRAs: When you pay taxes on withdrawalsTo understand how withdrawals from a traditional IRA will be taxed, you first need to consider your age when you tap this account. Withdrawals from a traditional IRA will be taxed differently if they’re made before you reach the age of 59 ½ vs. after.Early withdrawals from a traditional IRAIf you’re considering taking money out of your IRA before age 59 ½, then beware: You will likely pay taxes on the amount of money you withdraw and you may owe a penalty as well. This will leave you with just a fraction of the money you withdrew.What's left after taxes and penaltiesSuppose you make an early withdrawal of $10,000 from your traditional IRA account:Your federal income tax bill will likely range from $1,000 to $3,700, depending on your federal income tax bracket. You may also have to pay an early withdrawal penalty of 10 percent, or $1,000, on this withdrawal.You may owe state income taxes and penalties, too (though there are 13 states that don’t tax retirement income).That means you’ll probably pay a minimum of $2,000 in taxes on this $10,000 withdrawal, and that’s only if you’re in the lowest income tax bracket and if your state doesn’t also tax that income.The IRS imposes a penalty on early withdrawals to discourage savers from dipping into their retirement accounts early. That said, not all early withdrawals are subject to the 10 percent penalty, and the IRS allows some early distributions to be made penalty-free, including for certain types of hardships, to pay for qualified higher education expenses and to buy a first home.
Retirement Planning and Tax Optimization401(k) vs. IRA: The differences and how to choose which is right for you
401(k)s and IRAs are two common types of retirement plans. You can only contribute to a 401(k) if you work for a company that offers one, but you can typically fund an IRA as long as you earn money from working.But the differences don’t stop there. Read on to learn about how 401(k)s and IRAs stack up, including contribution limits, withdrawal rules, and investment choices.What is a 401(k)?A 401(k) is a tax-advantaged retirement account that’s sponsored by an employer. You can only invest in a 401(k) if your workplace offers one.When you contribute to a 401(k), the money is automatically deducted from your paycheck and invested. You’ll select the investments for the account, often from a menu of mutual funds, which pool investors’ money together to invest in many different securities, like stocks or bonds.Learn more:What is a 401(k)? A guide to the rules and how it works.In a traditional 401(k), you invest your money pre-tax, which lowers your taxable income for the year. Your money compounds and grows tax-free over time. Then, you pay taxes on your withdrawals.However, a growing number of plans now offer Roth 401(k)s, which you fund with post-tax money. You don’t get an up-front tax break on your contributions, but the money grows on a tax-deferred basis. If you follow certain rules, your withdrawals are tax-free in retirement.What is an IRA?IRA stands for individual retirement arrangement, though it’s more commonly known as an individual retirement account. It’s an account you set up individually, without the involvement of an employer. You can contribute to an IRA as long as you have earned income, i.e., money you earn from wages, a salary, self-employment income, or commissions. Or if you’re married and file a joint tax return, you can contribute if your spouse has earned income, even if you don’t make money working.As with 401(k)s, there are two different types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA is funded with pre-tax money; withdrawals are taxed as regular income. You may be able to deduct your contributions for tax purposes, depending on your income and whether you have a workplace retirement account.A Roth IRA is funded with post-tax money, so contributing won’t help you score a tax break for the current year. But your withdrawals are tax-free once you’re age 59½ and you’ve had the account for at least five years.You can set up an IRA at most major brokerages. You’ll need to select your investments. You can typically invest IRA money in pretty much any stock, bond, mutual fund, or exchange-traded fund (ETF) you choose.Learn more:Robo-advisor: How to start investing right awayKey differences between a 401(k) vs. IRA401(k)s and IRAs are both tax-advantaged accounts that allow you to invest for retirement. Now, let’s break down the main difference between the two.401(k) and IRA eligibilityTo contribute to a 401(k), you need to work for a company that offers one. You’re eligible to put money into a 401(k) no matter how much you earn.You can fund an IRA as long as you (or your spouse if you’re married filing a joint return) have earned income for the tax year. However, you may face some income-based restrictions:Traditional IRAs:You can contribute at any income level, but you may not be able to deduct your contribution if you or your spouse have an employer-sponsored retirement account and you earn above certain thresholds.Roth IRAs:You’re only eligible to directly fund a Roth IRA if you earn less than the annual income limit. However, there’s a strategy called a backdoor Roth IRA that some higher earners use to fund a Roth IRA when they earn above the limit. Basically, you fund a traditional IRA, then convert it to a Roth IRA and pay taxes on the converted amount.401(k) and IRA matching contributionsThough some brokers may “match” a small percentage of your contributions, you’re pretty much on your own when it comes to funding your IRA. Most employers, however, match at least a portion of workers’ 401(k) contributions.Learn more:How a 401(k) match works and why you should seek it out401(k) and IRA contribution limits401(k)s contribution limits are significantly higher than IRA contribution limits, as you can see from the chart below.Note that the contribution limits are higher for both IRAs and 401(k)s for people 50 and older because they’re eligible for catch-up contributions, which is extra money that people nearing retirement are allowed to save in tax-advantaged accounts. The higher 401(k) contribution limits you’ll see for workers ages 60-63 in 2025 are a change ushered in by the Secure Act 2.0, a piece of legislation aimed at improving retirement security that passed in 2022.401(k) and IRA investment optionsA 401(k) has a relatively limited selection of investment options compared to IRAs. You may be limited to a handful of mutual funds selected by your plan’s administrator.You can usually invest your IRA in whatever stocks, bonds, or funds you choose. Some IRAs called “self-directed IRAs” let you invest in a broader range of assets, like cryptocurrency and precious metals. Only a few types of assets, like artwork and real estate that you personally use, are completely off-limits for IRAs.401(k) and IRA withdrawal rules401(k)s and IRAs are both meant for retirement savings rather than short-term savings. So, you’ll often face a 10% penalty on top of applicable taxes if you withdraw your money before retirement age.But there are a few exceptions.Under the rule of 55, you’re allowed to take penalty-free 401(k) distributions if you leave your job for any reason the year you turn 55 or any time after (or 50 or later for public safety workers). You can only take penalty-free withdrawals from the 401(k) plan of the company you worked for at the time you left your job.You can also access Roth IRA contributions (but not the earnings) without a penalty or taxes. But you’ll owe taxes or a penalty if you deplete your contributions and withdraw from the earnings portion of the account.The IRS allows you to take withdrawals from both 401(k)s and IRAs where you avoid the 10% penalty if you experience an “immediate and heavy” financial need, such as if you become disabled or have large medical bills. Not all 401(k) plans allow hardship distributions, though.Once you reach age 73, you’ll need to make mandatory taxable withdrawals called required minimum distributions (RMDs) from any pre-tax 401(k) or IRA. RMDs don’t apply to Roth 401(k)s or IRAs.401(k) and IRA loansMany plans allow you to take 401(k) loans. You won’t owe taxes or a penalty on the amount you borrow, but you’ll need to repay the loan, plus interest, within five years to avoid having it treated as an early distribution, which could result in taxes and a 10% penalty.The IRS doesn’t allow IRA loans. If you borrow money from an IRA, the entire account is no longer considered an IRA. The entire balance will then be considered income by the IRS.401(k) pros and cons401(k) pros:Many employers match some or all of your contributions up to a certain limit.You can contribute no matter how much you earn.The contribution limits are higher than IRA limits.You can take out a 401(k) loan if your employer allows it.401(k) cons:You need to work for a company that sponsors a 401(k) to contribute.Your investment options may be fairly limited.You may need to do a 401(k) rollover to another employer’s retirement plan or an IRA if you leave your job.IRA pros and consIRA pros:You can set up the account without involving your employer and won’t need to roll over the balance if you change jobs.IRAs have a wider range of investment choices.Roth IRAs allow you the flexibility to withdraw your contributions at any time without owing penalties or a 10% tax.IRA cons:Contribution limits are much lower than 401(k) limits.Roth IRAs are subject to income limits, and you may not be able to deduct traditional IRA contributions if you earn above a certain threshold and don’t have a workplace plan.There’s no employer match.You can’t take out an IRA loan.401(k) vs. IRA: Which should I choose?You’re allowed to contribute to both accounts up to the annual limits. However, if your employer offers a 401(k), you don’t have to choose between a 401(k) and an IRA.Since a lot of people don’t have unlimited budgets for retirement savings, a good recommendation is to save enough in your 401(k) to get your full employer match. Once you’re getting all that free money, invest in a Roth IRA if you’re eligible since you get the flexibility to withdraw your contributions if necessary.401(k) vs. IRA FAQsIs a 401(k) an IRA?No. A 401(k) and IRA are two different types of retirement accounts. While 401(k)s are employer-sponsored retirement accounts, IRAs are accounts you open individually.Is there a Roth 401(k)?Yes, most 401(k)s have a Roth 401(k) option that you fund with post-tax money that offers the potential for tax-free income in retirement. In the past, employer contributions were always made in a separate pre-tax account, but under the Secure Act 2.0, employers now have the option of making Roth (after-tax) contributions.Should I max out my 401(k) or IRA first?Contribute enough to your 401(k) to get your employer’s full match first. Once you’re doing that, you can contribute to an IRA if you have extra money to invest since there’s typically more flexibility than with an employer plan.
Retirement Planning and Tax OptimizationYou probably shouldn't wait till 70 to claim Social Security. Here's math to open your eyes (but nobody likes to show)
On paper, it seems rather obvious that the best way to optimize your retirement is to delay claiming Social Security for as long as possible.Must ReadThanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's howDave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and 3 simple steps to fix it ASAPApproaching retirement with no savings? Don’t panic, you’re not alone. Here are 6 easy ways you can catch up (and fast)According to the Social Security Administration, taking your benefits as early as possible (age 62 for those born after 1960) could result in lower monthly payments. At age 67, you qualify for full benefits, but if you delay your claim until age 70 you could enjoy a 24% total boost to monthly benefits. At 70 your monthly benefit stops increasing.With this in mind, many financial planners recommend delaying benefit claims for as long as possible until 70. However, this relatively simple math overlooks some key variables that could shock some retirement planners.“Age 70 is not the most financially rewarding age to initiate benefits unless an individual has a low discount rate and/or is confident they will live several years past their life expectancy,” says an article published in the Journal of Financial Planning by two financial experts. [1] The discount rate is the expected average rate of return that tells us the present value of future payments. It is used to decide if it's worthwhile to wait for Social Security.They said their calculations “do not support the presumption that the vast majority of people who choose to start their Social Security retirement benefits before age 70 are making a mistake.”Here’s the updated math some academics are using to suggest an earlier retirement could be a better option for some.Hidden risksWhile recommending delayed benefits, academics and economists use simple and generalized assumptions that do not fully reflect the reality of most retirees. That’s according to Derek Tharp — a financial advisor and associate professor of finance at the University of Southern Maine.In an article published in The Wall Street Journal, Tharp argues that this simple spreadsheet calculation assumes that “future dollars are worth almost the same as today’s dollars” [2]. This assumption is based on another assumption: that a retiree invests mostly in ultra-safe assets that earn little to no returns after inflation.By doing so, economists have missed opportunity cost, which is the returns of the forgone option.
Retirement Planning and Tax OptimizationGetting a 401(k) match from your employer: What that means and how it works
Key takeawaysA 401(k) match allows an employee to receive “free” money from their employer for contributing to their retirement plan.The amount of the match can vary with the employer’s contribution being a full or partial match up to some percentage of the employee’s salary.A 401(k) match is typically subject to vesting requirements, meaning this money does not become fully the employee’s until after some period of time.A 401(k) match is when an employer contributes a certain amount to an employee’s retirement account based on how much the employee contributes. Matching contributions from employers are fairly common, and taking advantage of them is an important part of saving for retirement. Experts sometimes refer to employer matches in retirement plans as “free money” because your company is giving you extra money just for contributing to your own retirement account.How 401(k) matching worksMany companies offer a 401(k) match as part of their retirement plan, but the exact terms of the match will depend on your employer’s unique offering. Here’s how the most common types of 401(k) matches work.Partial matchingA partial 401(k) match is when an employer contributes a portion of whatever the employee contributes to their retirement plan. For example, the employer might agree to match 50 percent of the employee’s contribution up to the first 6 percent of the employee’s pay. This means that if you make $60,000 per year and contribute 6 percent of your pay to the 401(k) plan, or $3,600, your employer will also contribute $1,800 (half of your contribution) for a total contribution of $5,400.You should make sure that you’re at least contributing enough money to your retirement plan to receive the full matching contribution from your employer. This is what experts are referring to when they talk about “free money.” It’s like earning a guaranteed 50 percent return on your contributions.Dollar-for-dollar matchingIn a dollar-for-dollar match, employers agree to contribute 100 percent of the employee’s contribution up to a certain percentage of the employee’s pay. In this scenario, if you earn $60,000 per year and contribute 3 percent of your pay to a 401(k) plan, your employer will match the contribution, allowing you to reach a total contribution of 6 percent of your pay. In this scenario, your contribution would be $1,800 and your employer’s match would make it a total contribution of $3,600.It’s important to think about what the total contribution to the plan will be and whether that amount is enough to help you meet your retirement goals. In many cases, simply contributing what’s necessary to receive the full matching contribution from your employer likely won’t be enough to help you reach your long-term goals.
Retirement Planning and Tax OptimizationHow a 401(k) match works and why you should seek it out
A 401(k) employer match puts free money into your tax-advantaged retirement account. Take the time now to learn how 401(k) matching programs work. This way, you can expedite your wealth progress and lay the groundwork for financial security in your senior years.Learn more:What is a 401(k)? A guide to the rules and how it works.401(k) match definedA 401(k) match is an employer-sponsored program that helps you save for retirement. Typically, the employer deposits money into your 401(k) in an amount that is contingent on your salary deferrals. Salary deferrals are your 401(k) contributions, which are deducted from your paycheck.Your salary deferrals are subject to annual contribution limits set by the IRS. The 401(k) contribution limit in 2025 is $23,500 or $31,000 if you are over 50. Your employer matching contributions do not count toward those caps. However, there is a separate, higher cap that applies to your combined total contributions from salary deferrals and employer match. In 2025, that combined limit is 100% of your compensation or $70,000, whichever is less.Common 401(k) matching rulesEvery 401(k) matching program has matching rules, which are the formulas that define how much the employer will contribute. Matching rules can vary widely from one employer to the next. Many follow a one- or two-tier structure.One-tier matchinguses a single contribution formula that applies up to a percentage of your salary. For example, your employer might contribute $0.50 for every $1 you contribute, up to 6% of your salary.Two-tier matchinguses two formulas applied sequentially. An example is the employer that matches 100% of your contributions up to 3% of your salary plus 50% of your contributions on the next 2%. In this case, your salary deferral would have to be 5% of your pay to maximize your employer match.In addition to the matching formula, some employers also cap annual matching contributions with a dollar limit.Learn more:How much should I contribute to my 401(k)?Up NextWhat is a 401(k)? A guide to the rules and how it works.How much should I contribute to my 401(k)?Retirement planning: A step-by-step guideDefining a good 401(k) matchAccording to Vanguard's annual How America Saves report, the most common matching formula across Vanguard retirement accounts is $0.50 per dollar on the first 6% of pay. Under this arrangement, you would contribute 6% of your salary and your employer would match with a 3% contribution.Relative to what's most common, you can define a good 401(k) match in two ways:The formula matches more than 50% of your contribution.As an example, a program that fully matches your contributions up to 5% or 6% of your salary is competitive. In that case, you would contribute 5% or 6% and receive total contributions worth 10% or 12%, respectively.The formula matches more than 6% of your salary.A match that contributes $0.50 to every $1 on up to, say, 8% of your salary is also generous. You would contribute 8% and receive total deposits worth 12%.Companies with the best 401(k) matchFor additional context on what a good 401(k) company match looks like, below are five employers that have lucrative matching rules:Aerospace companyBoeingmatches 100% of your contributions on up to 10% of your salary, allowing savers to stash up to 20% of their pay.Southwest Airlinesfully matches your contributions on up to 9.3% of eligible earnings.ConglomerateHoneywellcontributes $0.875 for every $1 you contribute on up to 7% of your base salary.Financial services companyCitifully matches your contributions on up to 6% of your salary.Communications providerComcastmatches your contributions dollar-for-dollar up to 6% of your gross pay.Vesting: Taking ownership of matching contributionsYou can also evaluate a matching program by its vesting rules. Vesting rules define when you take ownership of those matching contributions.The timing of ownership becomes important if you switch jobs. This is because you forfeit unvested contributions and their investment gains once your tenure with the employer ends. Typically, the employer will remove the funds from your account prompted by one of the following:You transfer funds to another employer's 401(k) plans or a rollover IRA.The fifth anniversary of your resignation date has passed, and you have not resumed work for that employer.Some employers allow for immediate vesting, while others use a phased schedule. Phased vesting might transfer ownership to you over five years, such as:Year 1:You do not own any matching contributions.Year 2:You own 20% of the matching contributions.Year 3:You own 40% of the matching contributions.Year 4:You own 60% of the matching contributions.Year 5:You own 80% of the matching contributions.Year 6:You own 100% of the matching contributions.Under this schedule, you would keep 40% of your matching contributions if you quit during your third year of employment. The remaining 60% plus any associated investment returns would be forfeited. Note that your account balance may reflect all contributions, vested or not, until unvested funds are recaptured by the employer.The long-term value of employer matchYou can project the long-term value of any matching program using a compound interest calculator. To demonstrate, let's establish some context. Say you make $75,000 annually, and your employer matches $0.50 for every $1 up to 6% of your pay. You plan on investing primarily in stock funds and retiring in 20 years. For simplicity's sake, your salary net of inflation remains the same over the 20 years.With a 6% salary deferral, you will make $90,000 in contributions in that timeframe. Assuming your 401(k) earns an average 7% annually after inflation, those contributions will grow to an ending balance of about $185,930 — not including employer match.Under the same growth and timing assumptions, the matching contributions will add nearly $93,000 to your ending balance. That amount can make a significant difference in your quality of life in retirement.Build financial security with free moneyOver time, your employer match can add tens of thousands of dollars to your retirement wealth. Make use of it by setting your contribution rate high enough to collect every penny of free retirement money available to you.
Retirement Planning and Tax OptimizationHealth savings account pros and cons
Key takeawaysHSAs offer a rare triple tax advantage: contributions are pre-tax, growth is tax-free and withdrawals for qualified medical expenses aren’t taxed.Balances roll over year to year and the account is yours to keep even if you change jobs — unlike most FSAs.You must be enrolled in a qualifying high-deductible health plan (HDHP) to contribute. For 2026, you can contribute up to $4,400 (individual) or $8,750 (family).HSA funds used for nonmedical expenses before age 65 are subject to income tax plus a 20 percent penalty.After 65, HSA funds can be used for anything — you’ll owe income tax but no penalty — making the account a flexible retirement savings tool.A health savings account (HSA) allows anyone with a qualifying high-deductible health plan to set aside pre-tax money to pay for approved medical expenses. The funds are held by an HSA trustee (a bank, credit union or other financial institution) until it is withdrawn to pay for certain health-care costs.HSAs come with significant tax advantages and long-term savings potential, but they also have real limitations. Here’s what to weigh before opening one.HSA contribution limits for 2025 and 2026The IRS adjusts HSA contribution limits annually for inflation. Here are the current and upcoming limits:2025:$4,300 (self-only coverage) | $8,550 (family coverage)2026:$4,400 (self-only coverage) | $8,750 (family coverage)Catch-up contribution (age 55+):$1,000 additional per year (unchanged). This applies to each eligible spouse individually — if both spouses are 55 or older and HSA-eligible, each can contribute an extra $1,000, but they must use separate HSA accounts.To qualify, your HDHP must meet minimum deductible requirements. For 2026, the minimum annual deductible is $1,700 for self-only coverage and $3,400 for family coverage.Advantages of a health savings accountTriple tax benefitHSAs are one of the only accounts that offer a tax break at every stage. Contributions reduce your taxable income (whether made through payroll deduction or on your own). The money grows tax-free. And withdrawals for qualified medical expenses aren’t taxed either.Balances roll over indefinitelyUnlike a flexible spending account (FSA), which typically must be spent by the end of the plan year, HSA funds have no expiration. Your balance carries forward year after year, growing over time.Learn more: What is an FSA and how does it work?The account is portableYou own your HSA. If you leave your job, switch employers or retire, the account goes with you. This makes it a more reliable long-term savings vehicle than employer-tied accounts.
Retirement Planning and Tax OptimizationI Have $845K in a Traditional IRA. What's the Most Tax-Efficient Way to Do a Roth Conversion?
SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.There’s no way to entirely avoid paying income taxes when you convert a traditional IRA into a Roth account. However, with smart financial planning you can reduce the impact of those taxes.By converting your portfolio in segments rather than all at once, you can keep your taxable income down and avoid entering a higher tax bracket. This, in turn, can reduce the amount that you pay on each dollar that’s converted over time.Say that you have $845,000 in a traditional IRA that you want to convert into a Roth IRA while also reducing the tax hit on the conversion. Here’s how you could think about it.Afinancial advisorcan help you roll over your retirement savings into a Roth IRA and manage your investments.Connect with a fiduciary advisor today.What Is a Roth Conversion?A Roth conversion requires you to pay income taxes on your pre-tax assets while moving them to a Roth IRA.There are, generally speaking, two types of tax-advantaged retirement accounts: pre-tax and post-tax.Pre-tax accounts, such as 401(k)s and traditional IRAs, offer a tax deduction at the time of investment. Each year you can invest up to the annual IRS contribution limit and pay no taxes on that money, making it cheaper to save more. Then, in retirement, you pay income taxes on all withdrawals (including the original contributions).Post-tax accounts, such as Roth IRAs, offer a tax advantage at the time of withdrawal. Each year you can contribute up to the annual limit with money that you’ve already paid income taxes on. Then, in retirement, you pay no taxes on your withdrawals.A Roth conversion is when you roll money over from a pre-tax portfolio into a Roth IRA, paying income taxes on the money that you convert. Once you make this conversion, your portfolio will grow and operate according to the rules of a Roth IRA.Unlike Roth IRA contributions, which are capped at the annual IRA contribution limit ($7,000 in 2025), there is no limit to Roth conversions. You can make as many conversions as you would like each year, in any amount. For example, say you have $845,000 in a traditional IRA. You could convert up to the entire amount in one year or you convert it bit by bit over a number of years.Anyone approaching retirement should be aware that Roth conversions are subject to a five-year rule: money that’s converted cannot be withdrawn for at least five years (unless you’re 59 ½ or older). Withdrawing any of the converted funds before the cooling off period ends will trigger a 10% early withdrawal penalty. However, a financial advisor can help you determine how and when to do a Roth conversion.
Retirement Planning and Tax OptimizationRoth IRA vs. traditional IRA: Which is better for you?
Both individual retirement account (IRA) types — traditional and Roth — offer valuable retirement-planning benefits, but with different structures, income limits, and pros and cons.Key takeawaysTraditional IRAs offer the potential for tax deductibility in the present, while Roth IRA contributions are made with after-tax dollars.Withdrawals are also taxed differently: Income taxes are due on distributions from a traditional IRA. Qualified Roth IRA withdrawals, however, are tax-free.Eligibility to contribute to a Roth IRA is based on your income. Anyone with earned income can contribute to a traditional IRA, but your income and other factors affect how much of an upfront tax break (if any) you can claim.Both types of IRA are sound choices for saving for the future, and having a mix gives savers a balance of tax breaks both now and down the road.How the traditional IRA worksA traditional IRA helps you save for retirement and might give you a tax break today. For example, if you contribute $4,000 to a traditional IRA this year, you may be able to deduct that amount on your tax return. This allows you to enjoy a nice break on your obligation to the IRS — subject to income limitations — while your investment continues to grow. Your money will grow tax-deferred until it’s withdrawn.You can continue to contribute funds up to the annual contribution limit every year: $7,000 for those under 50 and an additional $1,000 (for a total of $8,000) for those over 50 in 2025.You can start making penalty-free withdrawals at age 59 1/2, and you must begin making withdrawals by the age of 73 or you’ll pay stiff penalties to the IRS. Whenever you do start taking money out, though, you will pay income taxes on the deductible contributions you made and the investment gains.How the Roth IRA worksA Roth IRA doesn’t provide any immediate tax benefits. So, if you decide to contribute $4,000 to a Roth IRA this year, it’s all after-tax money, meaning you won’t get to deduct the amount you save from your taxes. The benefits of a Roth shine when you begin to make withdrawals at age 59 ½ or later — all the compounded growth that has built up over the years is yours to keep tax-free.Unlike a traditional IRA, there is no timestamp for when you must start making Roth withdrawals. You can wait longer to access the cash, or even leave money in the account forever so it passes to your heirs free of income taxes.The annual contribution limits for a Roth IRA are the same as a traditional IRA: $7,000 for those under 50 and $8,000 for those over 50 in 2025.
Retirement Planning and Tax OptimizationShould You Choose a Traditional IRA Over a Roth for Retirement Savings?
Key PointsYou never escape income taxes, but IRAs can help you control when you pay them, possibly lowering your lifetime tax payments.Roth IRAs are exempt from required minimum distributions, a boon if it’s your intent to leave some of your retirement account for an heir.Many investors choose to have both a workplace 401(k) account as well as a self-directed IRA held with a retail brokerage firm.The $23,760 Social Security bonus most retirees completely overlook ›It's a question investors have been asking themselves since they were first given the choice back in 1998: Do I take my tax break now and pay taxes later, or do I pay my taxes now and enjoy tax-free IRA distributions later? A traditional IRA offers the former. A Roth IRA allows for the latter. That is to say, unlike traditional IRAs (sometimes called contributory IRAs), contributions to Roth retirement accounts aren't tax deductible. Also unlike traditional IRAs, though, distributions from Roth accounts aren't taxable.There's still no clear answer to the question. Or it might be more accurate to say that the answer changes from one investor to the next, since everyone's situation is unique. There is one common criterion every investor should consider, however, before choosing one or the other.An option for every scenarioIf you aren't familiar with the difference between a contributory IRA and a Roth IRA, here's a brief primer.Individual retirement accounts have been around since 1974, created by that year's Employee Retirement Income Security Act. That's when it was becoming clear that corporate pensions alone -- the source of most peoples' retirement incomes up to that point -- simply weren't up to the task any longer on their own. Workers embraced their new self-directed retirement savings vehicles too, using contributions to these accounts to lower their taxable income. Withdrawals from these ordinary IRAs, however, are treated as taxable income by the IRS.Congress took the idea a step further in 1978, introducing workplace 401(k) accounts to take more of the ever-growing pressure off of employers' still-struggling pension plans by allowing workers to tuck away much more of their income for retirement. Like the IRAs introduced just four years earlier, 401(k) accounts allow for pre-tax contributions. The IRS just collects what its due on the back end, when money is taken out of these accounts.Then in the late 1980s Delaware Senator William Roth and some of his colleagues introduced a different idea. Rather than allowing for tax-deductible contributions to IRAs now and taxing this money and its growth later, why not forego the tax break linked to contributions to retirement accounts and instead allow tax-free distributions from these IRA accounts as they are withdrawn in retirement? That idea became law in the Taxpayer Relief Act of 1997, leading to the creation of Roth IRAs in 1998.