Taxes on retirement contributions

In general, depending on the account you choose you may be able to make pre-tax contributions (meaning you pay no taxes on contributions and pay only when you withdraw the money), or you may be able make after-tax contributions (meaning you’ll get to make withdrawals without paying taxes on them).

Pre-tax contributions

Making pre-tax contributions to your retirement account could benefit you by giving you a lower overall tax liability when you file your taxes each year. To explain what that means, here is an example. If a single filer earns $50,000 gross pay annually, that puts them in the 22% tax bracket¹. With a rate of 22%, they’ll pay approximately $11,000 in federal taxes. However, if they have a gross pay of $50,000 and contributed $10,000 to a 401(k) plan that year, their total tax liability would now be about $40,000. At a rate of 22% they would end up paying only about $8,800 when their annual taxes are due.

These are the types of retirement accounts which take pre-tax contributions:

• Traditional 401(k)
• Traditional IRA
• 403(b)
• 457(b)

After-tax contributions

After-tax contributions exist for “Roth” accounts. Roth accounts get their name from Delaware Senator William V. Roth Jr.² who helped introduce Roth IRAs through part of the Taxpayer Relief Act of 1997.³ Senator Roth was a well-known advocate for tax cuts that would encourage economic growth. Roth 401(k)s were first introduced in 2001.⁴ Now, there are also Roth versions of 403(b) and 457(b) accounts.⁵

These could be beneficial to someone whose retirement income level pushes them into a higher tax bracket, requiring them to pay more taxes in retirement than they did when they were employed. The more money you have saved, the larger your required minimum distributions will be and the more income tax you may have to pay on those distributions. If you currently have a pre-tax retirement account, there may be options to switch it or have it “rollover” to a Roth account. Be aware that you will need to pay taxes on the funds that rollover during that year.

Taxes on retirement withdrawals

As noted above, withdrawals from pre-tax accounts do have tax consequences. These withdrawals are taxed at the rate corresponding to which tax bracket you fall under. Check out these helpful links from the IRS which explain how distributions from each account work. You can also find help with calculating what you might owe at irs.gov.

Withdrawals from Roth accounts are not taxable under certain circumstances. Other forms of retirement income that can be taxed are:

Pensions, Annuities, & Social Security

Pensions and annuity payments may be taxed by the IRS at your regular rate. However, certain types of pensions such as military or disability pensions may be entirely tax-free. A portion of Social Security benefits may be subject to income tax, depending on your total income. State income taxes on pensions, annuities, and social security will vary. When you’re thinking about which state to retire in, this is an important factor to consider.⁶

In Massachusetts, Social Security income is exempt from your gross income, meaning your payments will not be taxed. Most private pensions and annuity plans are taxable but many government pensions are exempt.⁷

Remember, everyone’s retirement journey is unique, so personalized advice is essential. Consult a financial advisor to create a tax-efficient retirement plan tailored to your goals and circumstances.

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Disclaimer: This content is intended to provide general information and shouldn’t be considered legal, tax, or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your individual financial situation.

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Pay off debt first

If you still owe any debts, you will want to eliminate those before retiring. Removing those liabilities means you will have more money to put away, and less to worry about after you stop working. You can use payoff strategies like the snowball or avalanche strategy. Some more options to help you do this are:

Low-rate balance transfer credit cards
Transferring your credit card balance to a low-rate or 0% interest rate card means you can pay down your balance faster.

Debt consolidation loans
You can consolidate multiple accounts in one payment with a personal loan or home equity loan. These typically offer much lower rates than a credit card would, and consolidating multiple loans into one means you’ll have less payments to make.

Downsizing your home
If you’re still paying a mortgage on a multibedroom home and you no longer need all that space, you may be able to sell it and move to a smaller home of less value. This will help you earn a chunk of money to set aside. Which brings us to our next tip.

Liquidate assets

Even if your mortgage is fully paid off, downsizing your home is still a good idea to earn some money. Likewise, look at your other assets and see what you can let go of for some cash. Do you have a motorcycle or vanity car that you don’t necessarily need? Expensive clothes or jewelry that you don’t wear anymore? Decide what retirement looks like for you and make the decisions that will help you get there.

Maximize contributions to your retirement plans

If you’re contributing the minimum percentage to your employer sponsored retirement plan, it’s time to think about raising it. If your employer matches up to 5% of your contribution but you’re only contributing 3%, you’re missing out on what is essentially free money. So make sure you’re taking full advantage of your employer’s benefits.

Be aware that 401k and IRA plans have yearly contribution limits that you cannot exceed. However, those age 50 and older can make catch-up contributions. are:

• 401(k) or 403(b) -$24,500 with catch-up contribution of $8,000. Total = $32,500
• IRA – $7,500 with catch-up contribution of $1,100. Total = $8,600

Start saving in a Roth IRA

The main appeal of a Roth IRA is that your withdrawals are tax free. This means you’ll keep more money during your retirement than you would with a traditional IRA. Another benefit is that this account will not be tied to your employer, which gives you more control.

If you already have a Roth IRA, great! If not, you can rollover an existing retirement account into a new Roth IRA, but be aware you will likely have to pay taxes on the funds that rollover during that year.

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Avoid risky investing

Now is not the time for you to risk losing. It’s important to mix up your investments. By that we mean, don’t have all of your money in the stock market – the riskiest of all investments. Try spreading your funds across less risky products like bonds – or store it in high yield accounts like CDs or Share Certificates. If you work with a portfolio manager or retirement advisor, express your goals so they can advise you on the right moves to make.

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Consider insurance coverages

Everyone should anticipate rising costs for medical care as you age. Making sure you have the right amount of healthcare coverage can reduce what you have to pay out of pocket during your retirement.

Additionally, by switching other insurance policies like home, auto, life, or rental property insurance, you can save yourself some money on payments. Agents like those at our subsidiary, , work with a network of insurance providers so they can find you the right coverage based on your unique needs.

Change jobs

Exploring a new job opportunity can not only increase your salary but could potentially get you better benefits. Like an employer who will match a higher percentage of your 401(k) contribution, or who will give you better healthcare coverage, for example. If you do decide to change employers, don’t make the mistake of withdrawing the funds from your old 401(k), which will result in a withdrawal penalty. Rollover your funds to the new retirement plan instead.

Create a budget for daily spending

Finding out how much you spend on things like groceries, entertainment, transportation, and subscription services is a great place to start your budget. It’ll help you see what is essential spending and what is not. Perhaps you’ll be surprised by how much you’re spending on dining out and cut back by cooking at home more often. Budgeting tools like 91şÚÁĎÍř First’s Money Management allows you to see your spending broken down into categories and track your budgeting to see how you progress. To learn more about how to use saving and budgeting strategies, click here.

Hack your house

House hacking is a term coined to describe the act of generating income from your home. Whether you do this by owning a multifamily and renting out the other units, renting out the extra space on your property to a roommate, or renting out garage space for storage. This is a way to generate passive income with assets you already have. If you have children who have recently moved out, you likely have extra rooms that you could be using to earn money for your retirement.

Continue working

We know this is not the ideal path for retirement, but if you still find your accounts are lacking after all your efforts, you aren’t alone. Postponing your retirement for a few more years means more time for saving and contributing to those retirement accounts with employer match. Many retirees will also pick up part-time or seasonal work to earn some extra spending money after they’ve retired.

The bottom line

It’s never too late to start saving for retirement. If you plan, strategize, and invest wisely, you can still retire comfortably.

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If you choose not to withdraw it all, then you must take out a minimum amount of funds each year. The IRS uses a “” along with your previous end-of-year balance to calculate what your minimum would be. These rules apply to a handful of different retirement account types. Failure to withdraw your RMD could result in an IRS penalty.

What retirement account types do RMDs apply to?

According to the IRS, RMDs apply to these plan owners and their beneficiaries.

• traditional IRAs

• SEP IRAs

• SIMPLE IRAs

• 401(k) plans

• 403(b) plans

• 457(b) plans

• profit sharing plans

• other defined contribution plans

• Roth IRA beneficiaries

IRAs and RMDs

91şÚÁĎÍř First offers Traditional and Roth IRA certificates, as well as Spousal IRA certificates. RMD rules only apply to owners of traditional IRAs and the beneficiaries of Roth IRAs. There are no RMDs for Roth IRAs during the original owner’s lifetime. At this time, the IRS requires that you take your first RMD by April 1st of the year following the year you turn 73. The deadline for all other annual RMDs is December 31^st.

If you are a beneficiary or inherited an IRA from someone who passed away, different RMDs apply. Likewise, a different table is used to calculate them. Please visit the official for the most accurate and up to date information about retirement accounts, beneficiaries and Required Minimum Distributions.

*Effective 1/1/2023 the RMD age was changed to 73 and on 1/2/2033 the age will change to 75. Anyone born before 1/1/1951 has already started taking their RMD, so this change does not affect them and they must continue to take their annual RMD. Individuals born between 1/1/1951-12/31/1959 will begin at age 73. Lastly, anyone born after 1/1/1960 will have their RMDs begin at age 75.

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Retirement savings benchmarks by age

Personal investing firm, T. Rowe Price, conducted research (based on how household incomes grow each year and the assumed inflation rate) to come up with these savings benchmarks as of June 1, 2023.

Experts say you should aim to put away 10%-15% of your income in a retirement account each year. This means it would take approximately 5 years or less to have .5x your salary in retirement savings. So if you aim to hit that benchmark by 30, somewhere between age 20-25 is a good time to start saving.

Average retirement savings by age group

This is a loaded question, as household incomes will vary and the amount each individual can put away in a retirement account will vary with that. According to a Consumer Finances survey from 2019, these are the averages of retirement savings for different age groups. This includes all types of retirement accounts. Although, it’s important to know that most Americans will fall on the lower end of these averages. So don’t be alarmed if the number is more than you currently have.

Average IRA balances

According to research done by Fidelity Investments in the first quarter of 2023, these were the average balances of IRAs (Individual Retirement Accounts).

The average contribution to IRAs in Q1 2023 was $2,700. The allows contributions of up to $7,000 a year for individuals under age 50. And $8,000 a year for those 50 and older making catch-up contributions.*

Retirement Calculator

Our useful retirement calculator can help answer your questions.

Want to start growing your retirement savings? Check out our great rates for IRA certificates and visit a branch to open one today.

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*These contribution limits are accurate as of 2024.

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Why start saving for retirement?

You shouldn’t depend on Social Security Benefits as your only source of retirement income. According to the : on average, Social Security benefits replace only 40% of your pre-retirement income. So you’ll likely want to find a way to effectively replace the other 60%.

When should I start saving for retirement?

Aim to start saving for retirement in your 20s. This can be quite easy to do once you enter the workforce, as many employers offer company-sponsored retirement accounts that you can opt to contribute to each time you get a paycheck. Companies that offer these typically will offer an employer match of a certain percentage, but this percentage varies.

What this means is, with every paycheck you get, 3% (for example) is being deducted from it and deposited in the retirement account and your employer is depositing that exact amount into it too. You make the decisions and you can always opt to contribute more or less than 3% from your own paycheck, but don’t expect your company to match any higher than the percent limit they set.

If your employer offers a plan with company match, it would be in your best interest to take advantage of that benefit as early as you can.

How much should I be saving for retirement?

Some experts recommend that by age 30, you should have at least your yearly salary amount in a savings account. Others recommend that you save 10% to 15% of your pre-tax income per year. In order to know how much you will really need to live comfortably when you retire, you’ll have to determine your personal goals and plans for retirement living. Here are some things to consider:

• Will you continue living in the same home or will you downsize?
• Will you have remaining debt that will need to be paid off?
• Are you saving for yourself, for your children, or both?
• What new hobbies and pastimes will you be using your money for? Do you plan to do a lot of golfing or cruising?
• Medical costs can be expensive especially as you get older. Think about your health.
• Do you want/need to save for funeral expenses?

Some of these things can be daunting to think about at a young age, but are all important things to consider. The says the average American spends roughly 20 years in retirement. So you will need to have 20 years of expenses saved up, and then some – in case of emergencies.

What are my options for retirement accounts?

The three most popular types of accounts used for retirement savings are a 401(k) or Roth 401(k), an Individual Retirement Account (IRA) or Roth IRA, and a Pension. All three of these types of accounts can be offered by employers, but likely only one of the three. It’s important to know how these benefit plans work.

Each retirement account has limits on how much you can contribute per year. If you plan on saving any more than those limits, you may want to consider other types of savings accounts like a traditional savings, certificate, or money market account for the excess.

401(k) vs. Roth 401(k)

• Contribution Limits: $23,000 per year under age 50. Age 50 or older can contribute an additional $7,500, totaling $30,500 per year.*

Traditional 401(k) accounts are company-sponsored accounts in which you set up deductions from your paycheck to be deposited automatically. These will be deducted from your gross income, and income taxes are paid on the funds only when they are withdrawn. As we already mentioned, the biggest benefit of this type of account is the employer match.

Contributions to a Roth 401(k) are deducted from your after-tax income. When you withdraw the money at retirement, you will not have to pay any taxes.

Funds of these accounts can also be invested, typically in mutual funds or exchange-traded funds, which you will choose. As a result of this, your savings can go up or down with the stock market.

IRAs vs. Roth IRAs

• Contribution Limits: $7,000 per year under age 50. Age 50 or older can contribute an additional $1,000, totaling $8,000 per year.*

In simple terms, a Traditional IRA is funded with pretax money. You pay taxes on the funds when they are withdrawn from the account. Like the Roth 401(k), a Roth IRA is funded with post-tax money. You pay taxes on your contributions each year, but pay nothing when you withdraw the funds at retirement. It’s up to you whether you want to pay as you go, or pay out what could be thousands when it’s time to withdraw. These accounts typically earn compound interest.

At 91şÚÁĎÍř First, we offer IRA certificates. These accounts come in terms ranging from 12-60 months.** You can choose from a Traditional, Roth, or Spousal IRA. A Spousal IRA is the same as a regular IRA, but allows members with no or low earned income to contribute based on a few eligible requirements. (See our IRA product page for more info or speak with someone in our branches to see which is right for you.)

The funds in these accounts earn dividends. To know what happens when your term expires, see “What happens when my certificate matures?”

Pension

Traditional Pensions are different from these other accounts and are now rare to come by, but they do still exist. With a pension, your employer will contribute to a pool of funds invested for the benefit of all their employees, sometimes with the option for you to contribute part of your wages as well. This plan guarantees a specific monthly payment to you after your retirement. Many companies have moved away from this type of plan because it leaves the employer liable for the payments if the pension account runs out. 401(k)s and IRAs put the responsibility of saving on the individual, not the company.

These are the most popular types of retirement accounts, but there are more options. See for a full list of available retirement plans.

When should I withdraw my savings?

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The simple answer to this is – withdraw it when you retire. But you should also withdraw it when you are ready. If you reach retirement age and you don’t think you have enough saved to stop working just yet, you can wait. However, traditional IRAs and 401(k)s will have when you reach age 73 – meaning you will have to start withdrawing the money.

Any retirement account you choose may be subject to a penalty for early withdrawal. The IRS allows penalty free withdrawals from retirement accounts after age 59 ½. Note that the retirement age requirement to start collecting full Social Security benefits in 2023 is 67 (for people born in 1960 or later).

Visit a branch to get started with an IRA certificate.

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*These contribution limits are accurate per IRS.gov as of 2024. . .
**Limited-time special offers not included. See our rates page for more.

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