Your Guide to Taxes for Retirees and Retirement Accounts: A cheat sheet on contributing to, withdrawing from and converting 401(k)s, traditional IRAs, Roth IRAs and other funds

Funds in the accounts typically grow tax-deferred, but other features vary. Contributions to traditional IRAs and 401(k)s are often tax-deductible, but withdrawals are taxed as ordinary income (such as wages)—not the lower rates for long-term capital gains.

With Roth IRAs and Roth 401(k)s, the opposite is the case: Contributions are in after-tax dollars, but withdrawals can be tax-free. As a result, Roth accounts can be a good choice for savers who expect their tax rate to be higher or the same at withdrawal than at contribution.

CONTRIBUTIONS

These accounts typically have annual limits on contributions and sometimes income-eligibility requirements as well. Often savers must have at least as much “earned” income as the amount of their contribution, although there is an exception for spouses. Other limits can apply.

Contribution limits—traditional and Roth IRAs 

For both 2024 and 2025, the contribution to traditional and Roth IRAs is up to $7,000, plus $1,000 for savers age 50 and older.

The ability to deduct a contribution to a traditional IRA depends on the saver’s income and other factors, such as whether a saver is covered by a workplace plan. For details, see IRS Publication 590-A.

For Roth IRAs, the ability to make direct contributions depends on savers’ modified adjusted gross income. The limits for most single filers begin at $146,000 for 2024 and $150,000 for 2025. For most married joint filers, they begin at $230,000 for 2024 and $236,000 for 2025.

The deadline for traditional and Roth IRA contributions is the April tax deadline of the following year. So savers typically have until April 15, 2025, to make IRA contributions for 2024, unless they have extensions because they live in disaster areas.

Contribution limits—401(k)s, SEP IRAs and Solo 401(k)s 

The regular 2025 contribution limit: Up to $23,500 for all employees, plus $7,500 for savers age 50 and above. Beginning in 2025, savers age 60 to 63 can contribute an extra $3,750.

Total 2025 contribution limit: $70,000, plus $7,500 for savers age 50 and above. Savers age 60 to 63 get an extra $3,750.

The total limit applies to both employer and employee contributions to 401(k) and similar plans, including Solo 401(k)s, so-called mega backdoor Roth 401(k)s and SEP plans.

In many cases, savers with SEP IRAs and Solo 401(k)s can make contributions for 2024 until Oct. 15, 2025, if they have an extension to file their returns.

CONVERSIONS

Roth IRA conversions 

Savers can convert all or part of a traditional IRA to a Roth IRA, but they will owe income tax on the transfer. Future tax-free withdrawals from the Roth accounts won’t push the saver into a higher tax bracket or trigger higher Medicare premiums.

Backdoor Roth IRA conversions 

This strategy offers savers who earn too much to make direct Roth IRA contributions a way to get money into a Roth IRA via a two-step process. But savers with existing traditional IRAs should beware of pitfalls.

Backdoor ‘mega-Roth’ 401(k) conversions

With mega-Roth conversions, employees can immediately transfer after-tax money in the traditional 401(k) plan into a Roth 401(k) when taxable earnings on it are nil or minimal. Some employer plans allow workers to make conversions automatically every pay period.

For more information on contributions to these accounts, see IRS Publications 560 and 590-A.

WITHDRAWALS

Required withdrawals from IRAs and workplace plans such as 401(k)s

Savers typically must begin required minimum distributions, or RMDs, from these plans for the year they turn 73. They can delay the payout until the following April 1—but that would mean taking two RMDs in one year.

If someone is employed by the company sponsoring the workplace plan, mandatory withdrawals often don’t apply until retirement.

There are no required withdrawals from Roth IRAs and Roth 401(k)s for the original owner, or for an owner’s spouse who inherits the account and rolls it into his or her own Roth IRA.

Early withdrawals and borrowing

Because these accounts are meant for retirement, savers who make withdrawals before age 59½ often owe tax plus a 10% penalty.

Savers with retirement accounts can sometimes make withdrawals before age 59½ without the usual 10% penalty, but the rules are complicated and vary by type of account. In addition, employers can impose their own limitations on withdrawals from workplace plans such as 401(k)s.

Exceptions to the 10% penalty on early withdrawals of traditional IRA funds and Roth IRA earnings include payouts for certain medical and educational expenses, among others.

Roth IRAs often allow the most favorable withdrawals. Savers can pull their contributions—but not earnings—at any time without owing a penalty or taxes. Once an account holder turns 59½ and has had the Roth IRA at least five years, he or she can withdraw contributions and earnings tax-free.

Many employers allow workers to borrow from their 401(k) accounts, but defaulting on the loan can bring taxes and penalties. Hardship withdrawals are typically allowed for savers facing an “immediate and heavy” financial need, such as disaster-related expenses.

Penalties for missed RMDs 

The penalty for missed withdrawals is 25% of the amount that should have been withdrawn. The penalty drops to 10% if corrected in a timely manner.

Inherited IRAs

If the original IRA owner died before 2020, heirs can often take required withdrawals over many decades. But if the original owner died in 2020 or after, most heirs must now drain the accounts within 10 years.

Exceptions to the 10-year payout apply for some heirs, especially surviving spouses. They often can continue to stretch required payouts over many years. For minor children of the deceased IRA owner, the 10-year withdrawal period typically begins at age 21.

In addition, if the original IRA owner was required to take RMDs, the heir typically has to take annual payouts during the 10-year withdrawal period. These payouts were suspended pending IRS guidance for 2021-2024, but they are required beginning in 2025.

CHARITABLE DISTRIBUTIONS

IRA qualified charitable distributions (QCDs)

This benefit allows retirees age 70½ or older to donate IRA assets directly to one or more charities each year and have the donations count toward their required annual withdrawals. For IRA owners who give to charities, this is often a highly tax-efficient move.

• 2024 QCD limit: $105,000

• 2025 QCD limit: $108,000

Charitable Gift

IRA owners who are 70½ or older can also use account assets to fund a charitable gift annuity. In general, the IRA owner gets a minimum payout of 5% annually, taxed as ordinary income, and the charity gets what is left at the donor’s death. Only the IRA owner, or the owner and spouse, are allowed to receive the payouts.

• 2024 limit: $53,000

• 2025 limit: $54,000

IRA deferred annuities

IRA owners can use account funds to buy qualified longevity annuity contracts, or QLACs, to provide income in old age. Under the rules, IRA owners or 401(k) participants can use up to $210,000 for QLACs in 2025 that provide payouts that begin later—say at age 80 or 85—and are guaranteed for life.

For more details on retirement-account withdrawals, see IRS Publications 590-B and 560.

Source: WSJ