While the daily news cycle can make anyone feel anxious about their nest egg, a quiet and highly strategic shift is underway within American retirement accounts. Rather than running to the sidelines or moving to cash when things get bumpy, seasoned savers are building up their balances and locking in long-term security.

The latest data from Fidelity’s Q1 2026 retirement analysis shows that today's preretirees are moving away from emotional, knee-jerk decisions and instead focusing on steady discipline and smart tax planning.

“Retirement savers started the year strong with record-high savings rates and contributions, reflecting the long-term approach they’re taking with retirement preparedness," said Sharon Brovelli, president of Workplace Investing at Fidelity Investments.

According to Fidelity's analysis, which tracks more than 54 million accounts across IRAs, 401(k)s and 403(b)s, American workers have entered an era of financial discipline. Rather than surrendering to market fluctuations, retirement account holders are locking in long-term positions and building structural financial defenses.

The sentiment vs behavior divergence

A gap has emerged between negative economic sentiment and the actual financial behavior of experienced savers. While broader economic indicators have generated widespread uncertainty, total savings rates surged to historic highs in the first quarter.

The combined employee and employer contribution rate for employer 401(k) accounts reached an unprecedented 14.4%, moving closer to Fidelity's recommended 15% target. At the same time, 403(b) workplace savings rates reached 12%.

Individual investors also expanded their independent safety nets; total IRA contributions surged 29% year-over-year, supported by a 28% increase in the number of individual accounts actively contributing. Roth accounts were the most popular, accounting for 67% of IRA contributions.

Managing what you can control to beat market drops

This steady cash inflow from contributions has created a short-term disconnect between what savers can control and immediate market returns. During the first quarter, brief market volatility caused average account balances to decline slightly on a quarter-over-quarter basis.

Specifically, the average IRA balance fell 4% from Q4 2025 to $131,380 in Q1. Workplace 401(k) accounts averaged a slightly higher $141,000, which was also down 4% from the previous quarter. Considering the longer-term trend, however, 10-year balances are up 46% for IRAs and 61% for 401(k)s, according to Fidelity.

In previous decades, shrinking balances often sparked emotional panic, prompting investors to freeze their contributions. However, in this period, investors took the opposite approach. Nearly one in five plan participants (18%) successfully increased their savings rates during this period, while asset-allocation adjustments remained near historic lows at 5.7%, down from 6.0% a year prior.

Keeping asset allocation steady regardless of market fluctuations is a strategy that has been rewarded in the long term; despite minor quarterly fluctuations, average 401(k) and 403(b) balances increased 7% and 11%, respectively, above their 2025 levels.

The shift to tax-free growth

Perhaps the most strategic behavior highlighted in the data is the massive acceleration into post-tax accounts. Roth accounts dominated the market, representing a staggering 67% of all Q1 IRA contributions. More remarkably, Roth conversion transactions escalated by 41% year-over-year.

A Roth conversion requires an investor to pay ordinary income tax on assets immediately, out of pocket, at current tax rates. Choosing to take a definitive, immediate cash-flow hit during an uncertain economic landscape suggests investors are heavily prioritizing future tax flexibility and predictability over immediate liquidity.

Automated inertia

As the data show, the primary reason contribution rates went up isn't that millions of Americans suddenly found the collective willpower to log into their accounts and manually increase their savings during a turbulent quarter. They did it because of auto-escalation features built into their workplace retirement plans.

When a system automatically bumps a worker's contribution rate by 1% every year, inertia becomes a superpower. Because it takes manual effort to log in and stop the increase, most people just let it ride.

For the portion of the data that was manual — specifically the 29% surge in IRA contributions and the 41% spike in Roth conversions — we're seeing the reality of a much more financially literate investing public.

Long-time savers have finally internalized a lesson that financial planners have been preaching for decades: Market downturns are a buying opportunity. In this case, these savers "bought" a tax-free stream of income and fewer RMDs.

Long-term vision over short-term noise

For decades, economists worried that emotional panic would always be the Achilles' heel of the individual investor. However, Fidelity’s Q1 2026 analysis reveals a different story. The latest retirement trends show that the modern pre-retiree is becoming a more resilient saver.

By maintaining a steady approach that has brought average savings rates close to the recommended 15% benchmark, investors have largely avoided the psychological traps of market volatility — at least in the first quarter.

This stability has allowed them to focus on what matters most for the next chapter: capitalizing on temporary market dips to execute strategic Roth conversions.

By accepting an upfront tax hit today, these savers are mitigating the risk of future tax hikes and building more predictable financial security for themselves and their heirs.

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Dear Wealth Wise: As a retired 66-year-old, I find plenty of guidance on portfolio allocation but very little on asset location — how investments should be divided among taxable accounts, traditional IRAs/401(k)s, and Roth IRAs/401(k)s.

Many experts suggest a portfolio split such as 50% stocks (mostly U.S., with some international exposure) and 50% more conservative investments, such as bonds and money market funds. But there's far less discussion about where those assets should be held to maximize after-tax returns. I feel undereducated on the topic of asset location and would like more guidance on how retirees can optimize investments across accounts with different tax characteristics.
— Where Should I Stash My Assets?

Dear "Where Should I Stash My Assets?": Asset allocation is an important part of retirement planning. And you, as a 66-year-old retiree, seem well informed about how much of your portfolio should go into aggressive holdings like stocks versus stable or income-producing assets like bonds.

But your question is one that's not raised often enough — where do the assets actually go?

Mark Sanaiha, CFP, founder and wealth advisor at Macallen Capital, says he likes to tell clients to follow a simple rule.

"Put your least tax-efficient assets where the IRS can't touch them, and your most tax-efficient assets where they're built for low taxes."

Let's dig deeper into that strategy to answer the burning question of how to find the right home for your various retirement assets.

Assets that belong in a traditional IRA or 401(k)

Traditional IRAs or 401(k)s offer the benefit of tax-free contributions and tax-deferred gains while you're in the process of building wealth. In retirement, though, they become less tax-efficient, since withdrawals are taxable and required minimum distributions (RMDs) eventually kick in.

Cody Garrett, CFP, owner and financial planner at Measure Twice Financial, says, "Traditional pre-tax retirement accounts should generally hold tax-inefficient assets, such as taxable bonds, money market funds, REITs, and BDCs."

As Garrett explains, these assets tend to distribute ordinary income rather than qualified dividends and can have higher yields than equities.

Garrett also says that for many retirees, it makes sense to allocate most or all of their bond holdings to traditional retirement accounts. Doing so could shelter your bond interest from immediate taxes, which is important, since bond interest is taxed at ordinary income rates.

Assets that belong in a Roth retirement plan

Roth accounts are often touted as a shining example of tax efficiency. Though contributions are made with after-tax dollars, gains are completely tax-free, as are withdrawals. There are also no RMDs to worry about.

Because assets held in a Roth IRA or 401(k) aren't subject to tax gains, Garrett says, "Roth accounts are often best used for assets with the highest expected long-term growth."

If you have U.S. or international stock market funds and other growth-oriented equity investments, you may want to load them into your Roth.

Sanaiha says, "Your Roth IRA is your growth engine, … so don't waste that on cash or money markets."

Sanaiha also cautions that while it often makes sense to hold international funds in a Roth IRA, it depends on the fund.

"In some cases, the tax drag is comparable to a value fund, so we'll then consider traditional or Roth IRAs for placement," he says.

Assets that belong in a taxable account

With a taxable account (such as a standard, non-retirement brokerage account), there's no IRS benefit when you're contributing funds and building wealth. But there's flexibility. You don't have to worry about annual contribution limits, early withdrawal penalties, or RMDs. Still, it's important to choose the right assets for these accounts.

"Taxable accounts favor tax-efficient investments that produce little taxable income each year and receive long-term capital gains tax treatment on qualified dividends," Garrett explains. "Examples include low-turnover equity funds, such as U.S. stock market index funds. These investments often generate modest dividend income."

Garrett says taxable accounts can also be appropriate for holding crypto ETFs and other volatile assets.

"Investors can harvest capital losses if values decline, while long-term capital gains from securities held longer than a year receive favorable tax treatment," he says. "Many crypto investors instinctively place speculative assets in Roth accounts hoping for tax-free growth, but taxable accounts provide useful tax benefits if the investment performs poorly."

That said, many retirement investors may prefer to skip highly speculative investments like crypto, even with the tax-loss harvesting benefit.

Another attractive option to balance tax efficiency and liquidity needs is municipal bonds or muni market funds, which are exempt from federal income tax. Sometimes they may also be exempt from state or local taxes if they are for in-state bonds.

Assets that belong in an accessible bank account

Retirees are often advised to maintain a hefty cash cushion to cover emergency expenses or buy themselves the flexibility to leave their investment portfolios untapped during periods of market decline. This helps avoid locking in permanent portfolio losses.

Garrett says that from a tax-efficiency perspective, cash and money market funds are best suited for traditional retirement accounts since interest is taxed at ordinary income rates.

"That said, many retirees still prefer to maintain one to two years of liquidity in checking, savings, and other taxable accounts, sacrificing tax optimization for peace of mind," Garrett explains.

Your strategy may shift over time

It's good to go into retirement with a general framework of where to house your various assets. But Sanaiha says that just as your asset allocation might change over time, so too might some of your asset location decisions.

For example, since our reader is 66 years old, their RMDs will start at age 75 under the SECURE Act 2.0. They will have nine years to plan Roth conversions to reduce the risk that RMDs will force them into higher tax brackets.

Moreover, a retiree's asset locations will need to shift as asset allocations change. As you spend down your accounts, using the bucket or other retirement withdrawal strategies, your overall asset allocation will shift. If you spend all your taxable cash first, you may need to rebalance other accounts, which could trigger taxes.

"Asset location decisions should always be made in the context of your overall tax situation, RMDs, Social Security timing, and legacy goals," he says. "What's optimal at 66 may shift significantly by the time RMDs begin."

An evolving strategy, Sanaiha insists, could help you generate retirement income more efficiently while keeping the most money away from the IRS.

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our writers and experts, in this advice column, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial adviser regarding any questions you may have in relation to the matters discussed in this article.

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Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions on Roth IRAs and the five-year rule, including contributions and conversions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. What is the Roth IRA five-year rule?

Question: I understand that to withdraw money from a Roth IRA without paying tax or a penalty on the earnings, the account owner must have had the money in the Roth IRA for at least five years and be age 59½ or older. My question relates to when the five-year clock starts when contributions are made over several years. Also, do the rules differ for Roth IRA conversions?

Joy Taylor: The five-year rule your question refers to applies to Roth IRA contributions, rollovers and conversions, and whether distributed earnings are tax-free to you. Under this rule, distributions of earnings after age 59½ aren’t taxed if at least five tax years have passed since the year the owner first put money into a Roth IRA. For this first five-year rule, the five-year clock starts on January 1 of the year you first deposited money into any Roth IRA that you own, through either a contribution or a conversion from a traditional IRA. The clock doesn’t restart for later Roth contributions, conversions, or newly opened Roth IRA accounts.

Note there is another five-year rule that applies specifically to Roth IRA conversions, and whether the 10% early distribution penalty hits pre-age-59½ payouts. This rule is an anti-abuse rule to prevent people who are younger than 59½ from circumventing the early IRA withdrawal penalty by first doing a Roth conversion and soon thereafter taking the money out of the Roth IRA. This second five-year rule doesn’t apply to new contributions to Roth IRAs, but to conversions of pretax income from traditional IRAs to a Roth. Under this rule, if someone who is younger than 59½ does a Roth conversion, and later takes a distribution within five years of the conversion and before turning 59½, then the amount of conversion principal that is withdrawn is hit with the 10% penalty. Once you turn 59½, you needn’t worry, even if you take a payout before your conversion meets the five-year period. Under this second five-year rule, each conversion has its own separate five-year period, which differs from the first five-year rule discussed above.

For more on both of the five-year rules applicable to Roth IRAs, see our article, "What to know about the five-year rules for Roth IRAs."

2. When does the five-year rule start?

Question: I am 68 and have been doing Roth IRA conversions for the past three years. My first Roth conversion was in 2023. When does the clock start for the five-year rule? And are there separate five-year clocks for each Roth IRA conversion that I do?

Joy Taylor: In your situation, the five-year clock for withdrawing Roth IRA earnings tax-free begins on January 1 of the year that you first put money into any Roth IRA that you own, whether through contributions, rollovers or conversions. So if you first started funding a Roth IRA in 2023, and you don't have other pre-existing Roth IRAs, the five-year period begins on January 1, 2023. It doesn't restart after each conversion.

3. Another question on when the five-year rule starts

Question: I am 70 years old, and I have been doing Roth conversions over the past 10 years. My initial conversion was in 2017, and each year thereafter I converted more money. Does each conversion date have its own separate five-year period or does the five-year period start when I made my first conversion in 2017? I have no other Roth IRAs other than the one I opened in 2017.

Joy Taylor: In your situation, the applicable five-year rule begins on January 1 of the year you first put money into any Roth IRA, via contribution or conversion. And it doesn’t restart. Since your first Roth conversion was in 2017, you are in the clear, and your Roth distributions should be fully tax-free.

4. How does the five-year rule apply to transfers from a Roth 401(k) to a Roth IRA?

Question: I am 64, and I recently retired from my full-time job. While working, I contributed for many years to a Roth 401(k) account. A few months ago, I transferred the funds in that designated Roth 401(k) account to a Roth IRA. Can I start withdrawing money from my Roth IRA tax-free?

Joy Taylor: The general rule for Roth IRAs is that distributions of earnings are nontaxable, provided you are 59½ or older. There is an exception, what experts refer to as the five-year rule. Distributions of earnings taken out within five years of January 1 of the year you first contributed to a Roth IRA are taxed.

You may have had the Roth 401(k) for five or more years, but unfortunately, that time period doesn't transfer to the Roth IRA. So, if this is your first Roth IRA, and you don't have any other Roth IRAs that you had contributed to in the past, the five-year rule would apply. The five-year period begins on January 1 of the year you first put money into any Roth IRA, either through contributions, rollovers or conversions. The ordering rules that apply to distributions from Roth IRAs may mitigate some of the negative tax consequences in your situation. I would suggest speaking with a CPA or your financial planner for more information.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not, and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• All Ask the Editor Q&As
• Ask the Editor: Will I be Audited by the IRS?
• Ask the Editor: 10-Year Rule for Inherited IRAs
• Ask the Editor: Tax Questions on Roth IRA Conversions
• Ask the Editor: Reader Questions on QCDs
• Ask the Editor: More Questions on IRAs

Moving your retirement savings from an employer-sponsored 401(k) to an Individual Retirement Account (IRA) is often the result of changing jobs. However, this transition strips away the federal shield of ERISA regulations, exposing your nest egg to hidden costs, aggressive civil lawsuits, and administrative oversights.

True financial security requires understanding these structural gaps — ranging from shifting bankruptcy rules to the vanishing of spousal consent protections — and actively managing your retail accounts, such as IRAs, to replicate the institutional safeguards you left behind. Think your rollover is completely safe? Test your knowledge on how moving your 401(k) into an individual retirement account fundamentally alters your legal rights.

Don't worry if you miss an answer; you can follow the links below the quiz to brush up on your knowledge.

More on IRAs, from the Kiplinger team:

• The $9 Trillion Shift: Why Your Retirement is Less Safe in an IRA and How to Protect It
• Four Reasons to Roll Over Your 401(k) into an IRA (And Four Reasons Not To)
• Is Your IRA Protected from Creditors in Bankruptcy?
• How to Roll Over a 401(k) in Five Steps
• IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA
• Roth IRA Contribution Limits for 2026

Over the past decade, retirement investing has undergone a quiet but powerful transformation. Investors are no longer satisfied with portfolios limited to mutual funds and traditional market exposure.

Instead, many are seeking diversification, control and access to alternative assets — a shift that is accelerating the growth of self-directed IRAs (SDIRAs) and other flexible retirement structures.

A recent survey sent to more than 27,000 clients of the retirement platform IRA Financial, with more than 6,000 responses, offers a revealing look at how today's investors are thinking about their portfolios.

The results suggest that demand for alternative investments is not a niche trend but part of a broader evolution in how Americans approach retirement planning.

Investors want access to alternative assets — without giving up public markets

Perhaps the most striking takeaway from the survey is that investors are not abandoning traditional markets — they are expanding beyond them.

When asked what investments they were most interested in for 2026, respondents showed strong demand across both alternative and public asset classes:

• Real estate: 58.5%
• Public stocks and ETFs: 39.6%
• Cryptocurrency: 32.2%
• Private equity: 31.1%
• Gold and precious metals: 28.5%
• Promissory notes: 12.4%

The data reflects a growing belief that diversification now means blending traditional investments with alternative opportunities rather than choosing one over the other.

Real estate remains the most popular category, but interest in crypto, private equity and precious metals highlights how investors are seeking assets that may hedge inflation or offer differentiated return profiles.

This shift is influencing how retirement platforms evolve.

For example, in response to client demand, IRA Financial is launching an integrated investment experience in partnership with Interactive Brokers this month that allows investors to hold stocks, ETFs and alternative assets within one account.

Control and access — the primary drivers behind self-direction

The survey also revealed why investors first explored self-directed retirement strategies.

A significant 71.2% of respondents said they turned to self-direction because they wanted to invest in specific assets that traditional plans did not allow.

Another 46.1% cited the desire for greater control over investment decisions, while others pointed to diversification, fee reduction or referrals from trusted advisers.

These responses highlight a broader trend: Investors increasingly view retirement accounts as active investment vehicles rather than passive savings accounts. Traditional custodial restrictions, once considered standard, are now seen as barriers to opportunity.

Alternative assets are growing — but investors still value balance

Despite strong interest in alternatives, most respondents are not allocating their entire portfolios to non-traditional investments:

• 41.2% hold less than 25% of their assets in alternatives
• 30.6% allocate between 25% and 50%
• Only 11.3% report portfolios heavily concentrated in alternatives

This distribution suggests that investors are not chasing speculation — they are building balanced portfolios that incorporate alternatives alongside traditional holdings.

A similar trend appears when looking at retirement account allocations. Nearly half of respondents reported holding between 25% and 75% of their total investments inside retirement accounts, indicating that tax-advantaged structures remain central to long-term planning.

Not just accredited investors — a broader investor base is emerging

One of the most interesting findings from the survey is the diversity of investor backgrounds.

While 56.4% of respondents identified as accredited investors, nearly half did not, demonstrating that interest in alternative assets is no longer limited to ultra-high-net-worth individuals.

Many investors who may not qualify for traditional private placements are still seeking exposure to real estate, crypto and other non-traditional investments through accessible structures.

Additionally, 77% of respondents described themselves as intermediate or advanced investors, reflecting a growing level of financial literacy among retirement savers.

Meanwhile, 35.1% of participants reported being retired, underscoring how self-direction is being used not just for growth but also for income generation and portfolio management later in life.

Why demand for self-directed IRAs is accelerating

Taken together, the survey results reveal several underlying forces driving the expansion of self-directed retirement investing.

First, investors want flexibility. They are looking for platforms that allow both traditional securities and alternative assets without requiring multiple accounts.

Second, they are increasingly aware of the role diversification plays in managing inflation, market volatility and long-term wealth preservation.

Finally, technology and education have lowered the barrier to entry, making self-direction more accessible than ever before.

A new era of retirement investing

The data from the survey paints a clear picture: Retirement investing is evolving. Investors are moving toward hybrid portfolios that combine public markets with real estate, crypto, private equity and other alternative assets, all within tax-advantaged structures.

As platforms continue to innovate, including new integrated solutions launching in 2026, the gap between traditional brokerage investing and self-directed strategies is likely to narrow even further.

For many investors, the future of retirement planning is not about choosing between stocks and alternatives. It is about having the freedom to invest in both, in one place, with full control over how their portfolios evolve over time.

Related Content

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• Alternative Investments Under Trump: What You Need to Know
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• I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement Accounts

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Most of us assume our retirement savings are untouchable, but the law isn't always that simple. Depending on the type of IRA you own and/or how you inherited it, your "safe" money might actually be on the table for creditors. Take this 10-question quiz to see if your hard-earned savings are truly protected — or if you're sitting on a hidden risk.

Don't worry if you miss an answer; you can follow the links below the quiz to brush up on your knowledge.

More on IRAs, from the Kiplinger team:

• Is Your IRA Protected from Creditors in Bankruptcy?
• 6 Changes to IRAs, 401(k)s and HSAs in 2026
• The Average Retirement Savings by Age
• Roth IRAs: What They Are and How They Work
• IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA
• Roth IRA Contribution Limits for 2026
• SEP IRA Contribution Limits for 2026

Did you forget to take your Required Minimum Distributions (RMDs) late last year? You’re not alone.

Each year, nearly 7% — or 585,000 IRA holders — make that mistake, and that’s only at Vanguard. Many more retirees with traditional IRAs fail to take their RMDs every year.

The reasons why vary. For some, it's an oversight. For others, they don't even know what RMDs are, let alone when to take them. Generally, they start the year you turn 73, with your first RMD due by April 1 of the following year. After that, the deadline is December 31 annually.

Either way, it is costing retirees a lot of money in penalties. How much? Up to $1.7 billion a year at Vanguard alone, or between $1,160 and $2,900 per person based on the average annual RMD of $11,600. For those with a larger RMD, say, $19,000, the penalty for missing the deadline jumps to between $1,900 and $4,750. The more your RMD, the bigger the tax hit you face if you blow it off.

Don't forget the tax implications if you're forced to take several RMDs at once. Doubling up on distributions in a single year can easily push you into a higher income bracket, resulting in a significantly larger tax bill.

Why the big fee for missed RMDs?

The IRS imposes a 25% penalty for missing an RMD, which is much lower than the 50% it used to charge before the Secure Act 2.0 passed in 2023.

You can reduce the 25% penalty to 10% by withdrawing the overdue distributions within two years of the missed RMD and filing IRS Form 5329 showing you corrected the error.

If you can prove a "reasonable cause" for why you missed the RMD, the penalty may be waived entirely. Still, the better move is to stay on top of your annual withdrawals and avoid this altogether.

Even more worrisome, Vanguard's research showed that missing one RMD often leads to missing more. Among the self-directed IRA holders Vanguard analyzed, 55% of those who missed an RMD one year made the same mistake the following year.

“Most investors seem to make RMDs a routine, but rather than ‘set and forget,’ many simply 'forget and forget,'" said Andy Reed, head of behavioral economics research at Vanguard. “Reducing the rate of missed RMDs by even a modest amount could save investors hundreds of millions of dollars each year.”

Automate your RMD and never forget

There are ways to remember to take your annual RMD, and Reed argues the easiest is to automate the process. Sure, it requires a little effort up front, but after that, you won't have to worry about it.

"Automating it takes memory out of the equation," said Reed, noting that more than one-third of Vanguard's self-directed IRA customers have automated RMDs. "Among those clients, the odds of missing RMDs is 0%. It's the most surefire way to avoid forgetting, to avoid penalties and avoid a surprise tax bill if you have to take a bunch of RMDs at once." At Vanguard and other plan sponsors, automating your RMDs is a free service.

If you aren't tech savvy, be on the lookout for reminders from your plan sponsor. IRA custodians are required to send RMD notices by January 31 of each year, while some providers send out a courtesy reminder letter in October.

Many providers will also send follow-up reminders throughout the year ahead of the December 31 deadline. Typically, you can find RMD amounts in your quarterly or year-end statements.

Just do it! RMDs are unavoidable

RMDs are like taxes; you can't avoid them, but if you forget to take them, they can be expensive — to the tune of $3,000 or more a year. The good news is that with a little foresight and preparation, you don’t have to take the hit.

Whether you automate the process or mark it on your calendar, staying on top of your RMDs is an easy way to keep more money in your pocket!

Related Content

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• How to Calculate RMDs (Required Minimum Distributions) for IRAs
• The 'Wait-to-Win' Rule of Retirement Spending
• 3 Questions That Determine if You’re Actually Ready to Retire Early

Question: I'm retiring later this year at 67 with $2.6 million, most of which is in a traditional IRA. I'm worried about RMDs and taxes. What should I do?

Answer: As of 2022, the last year for which there's data available, the average 67-year-old retiree had about $609,000 in retirement savings, according to the Federal Reserve.

Moreover, retirement savers in their 60s only averaged $257,000 in their IRAs. If you're retiring later this year at age 67 with a $2.6 million IRA, you're clearly ahead of the game.

If that money is in a traditional IRA, though, you'll have to start taking required minimum distributions (RMDs) once you turn 73. While RMDs aren't guaranteed to be a problem, they could be if you find yourself in a situation in which you don't need the money.

Why does the IRS impose RMDs on traditional retirement plans? As Mark Steber, chief tax officer at Jackson Hewitt Tax Services, explains, "They want you to enjoy some of that money, but more importantly, they want the taxes from that money."

If you don't like the idea of facing RMDs in the future, there might be a way to largely get out of them. But it's important to proceed with caution.

Consider a Roth conversion carefully

If you don't want to deal with RMDs in retirement, the Roth conversion is a legitimate strategy, Steber says. The coming years might be an optimal time to do that conversion.

"If you're in that retirement income valley, and your income and tax rate go down substantially, that gives you the opportunity to take some of that retirement money and dump it into a Roth," he explains.

But, Steber says, you have to know what your total tax bracket is before rushing into Roth conversions. At age 67, you might be receiving Social Security or working a side hustle, both of which could affect your tax bracket. It's important to look at the big picture.

Robin Lovely, founder at The Women's Advisory Group, agrees that a Roth conversion could be a smart move in this situation. But she cautions against rushing into a major conversion at once.

"A series of smaller strategic conversions over the next few years could make more sense," she says. "The idea is to fill up your current tax bracket without spilling into the next one. That way, you reduce the size of your future RMDs and give yourself some tax-free income later on."

One drawback of doing a Roth conversion, whether in one fell swoop or over several years, is the potential to get hit with Medicare surcharges known as income-related monthly adjustment amounts, or IRMAAs. Because Roth conversions count as income, they could propel you into the IRMAA category in two years' time.

But Cody Garrett, owner and financial planner at Measure Twice Financial, says, "Some retirees worry about IRMAA when planning Roth conversions, but I don't let it rule the decision making. At any bracket, the IRMAA does not exceed 3% of household income based on modified adjusted gross income two years prior. It may be worth paying higher Medicare premiums for a few years to avoid higher tax rates and IRMAA for decades."

Don't put all of your money into a Roth

Timing Roth conversions strategically could let you off the hook from RMDs and associated taxes later in life while minimizing the tax blow in the near term. But Steber cautions not to move all your money into a Roth account.

"It is truly a best practice to have multiple types of retirement buckets," says Steber. That means maintaining a mix of traditional and Roth accounts.

"When you have multiple buckets, you have a lot more latitude for planning," he explains.

Steber points out that we don't know what tax breaks could come down the pike. There could be future tariff rebates or tax credits you can only qualify for if you have taxable income to report. As such, Steber says diversifying your retirement income is "a smart play."

Don't assume the worst if you're stuck with RMDs

A lot of people view RMDs as a negative in the context of retirement. But Garrett says, "With $2.6 million in a traditional IRA, RMDs may be meaningful, but they're not automatically catastrophic."

One thing to realize about RMDs is that they could serve as a green light to treat yourself to luxuries or a travel splurge you wouldn't otherwise spend money on. If you're charity-oriented, RMDs give you an opportunity to make qualified charitable distributions (QCDs) and support organizations that mean a lot to you.

There's nothing wrong with planning for RMDs and taking steps to reduce them in the future if you have a lot of money in a traditional retirement account, says Garrett.

At the same time, he says, "Please don't make Roth conversion decisions based on fear. There's often a temptation with large traditional retirement account balances to rush into aggressive Roth conversions. Slow down, take a breath, and unpack the comprehensive planning situation."

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"You've got to be kidding me — we can't afford that."

That was my future mother-in-law's response when I suggested some 30 years ago that she start an IRA and set up automatic monthly contributions .

My future in-laws were blue-collar workers juggling multiple jobs to make ends meet, with two kids in college and two in high school. They lived within their means but weren't familiar with investing, and my mother-in-law didn't have a workplace retirement plan.

I said, "Just give it a try for six months — if you can't afford it, you can always stop. And if it comes out of your checking account automatically, you won't miss it."

After months of pleasant but persistent persuasion, she decided to give it a go.

Creating this habit and making it automatic helped my mother-in-law achieve this important savings resolution.

Financial resolutions for the New Year

As the calendar turns to a new year, it's a great time to think about your resolutions — especially those related to personal finance.

Vanguard's recent consumer survey found that 84% of Americans have a financial resolution for 2026.

While 82% feel somewhat or very confident in their ability to achieve it, sticking with it for the year — let alone beyond the second Friday in January, known as Quitter's Day — can be tough.

Vanguard has four principles for investing success: goals, balance, cost and discipline — and in my opinion, discipline is by far the hardest to follow. But there's a secret for making healthy savings habits stick: Make them automatic.

Saving for your current self: Short-term goals

The survey's top two savings resolutions were to build an emergency fund and leverage a high-yielding account for short-term savings goals.

Where to begin?

First, make sure you're using a high-yielding savings vehicle so you can earn stronger returns. If you're one of the millions keeping cash in a traditional bank savings account, you're probably earning next to nothing.

If your annual percentage yield (APY) is less than 3%, it's probably time to reconsider where you're saving.

For example, as of December 12, 2025, Vanguard's Cash Plus Account offers an APY of 3.10%, although the APY will vary.

Once you've identified a high-yielding savings vehicle with a strong APY, consider automating a portion of your paycheck to that account.

Here's an idea to get you started: I bet you have at least one subscription to a streaming service you don't watch or a membership you don't use. Cancel it and redirect that money with a recurring contribution toward your savings.

Saving even $20 per month can add up quickly, thanks to the power of compounding.

Saving for your future self: Retirement

Start by checking out your workplace retirement savings plan, if you have one. Chances are, you're already set up for success.

According to Vanguard's How America Saves report, most plans will automatically enroll participants, set a contribution rate, match contributions up to a certain percentage and invest in a diversified portfolio.

Now is a good time to confirm if your contribution rate aligns with your intentions — especially if you've recently switched companies and might have been defaulted to a lower rate than your prior plan.

If you don't have a workplace plan, consider opening a traditional or Roth IRA and setting up automatic contributions.

Saving for your loved ones' education

College, secondary school and vocational training can all boost your potential earning power — but they can get expensive. A 529 savings account is a great way to save for education-related expenses.

You can set up automatic contributions to your 529 plan, too.

Make the habit automatic

My mother-in-law contributed faithfully to her IRA for more than 20 years until she retired — and today, it provides her with income.

Her unwavering discipline through bull and bear markets came down to one crucial decision: She made her monthly contributions automatic.

As you enter the new year, automating your contributions can go a long way toward helping you keep your financial resolutions in 2026 and beyond.

It might even earn you some brownie points with your mother-in-law.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Retirement planning is built on projections, but averages shape your financial reality. It’s not enough to know how much you need; you benefit from understanding how your financial picture compares to others.

One way to determine this is by looking at the average retirement income in the United States, categorized by age group and state.

The breakdown by age, from Empower, looking at the 2025 U.S. Census Current Population Survey, shows how the median and mean annual income for retirees change across different age brackets, from the more active 55 to 59 and 60 to 64 age groups to the later-stage 75-plus age group.

We also examined data on average retirement incomes across all 50 states, provided by Wisevoter and based on the U.S. Census Bureau's American Community Survey.

Knowing the average retirement income for your age bracket and state helps you benchmark your savings progress.

If the median household income for retirees in your state is, for example, $65,000, and your projected income is $40,000, you're below the local benchmark.

To maintain a similar standard of living in your area, you might decide you need to increase your savings or reduce your expected spending.

Retirement income by age, median and mean figures

Social Security provides a vital baseline, but it’s not enough to cover living expenses — especially when faced with rising health care costs and inflation. To bridge that gap, you need a realistic savings target.

By looking at data by age groups, you can see how much the average income drops over the course of retirement. The median income for those ages 60 to 64 is $83,770. That figure drops by $35,980 (nearly 43%) for individuals age 75 and older. This decline is attributed to a reduction in work income and the necessary drawdown of retirement accounts.

The median number is probably more representative of the actual average income in the U.S. than the mean number. This is because households with higher incomes tend to skew the mean calculation toward the high side.

Ultimately, the most important lesson derived from viewing average retirement income by age is recognizing the income deceleration that occurs in later years. The consistent decline in median income after age 59 underscores the financial risk posed by inflation and the cessation of work-related income.

This knowledge can be used to focus on creating a sustainable, tax-efficient withdrawal strategy today — one that accounts for the inevitable drop in income and prioritizes managing your future tax liabilities, such as required minimum distributions (RMDs), to protect the longevity of your portfolio. Your goal isn't just to reach the average, but to outlast it.

Average retirement income by state

Where you live is the single largest determinant of your retirement budget. While the national average retirement income serves as a starting point, it masks vast differences in the cost of living.

A detailed, state-by-state perspective can help you move beyond national generalizations, setting a savings goal informed by the real-world earnings of your counterparts in other states.

For instance, many states offer additional tax breaks for retirees. Some states exempt all retirement income from taxation, while other states offer substantial tax credits to retirees living on fixed incomes.

One reality you can't escape is how the federal government taxes your retirement income and estate. Even if you move to a state that doesn't tax Social Security benefits, pensions or has no inheritance/estate taxes, you will still be subject to federal taxes.

If you're considering a move, note that a state with a much higher average retirement income usually has a proportionally higher cost of living as well. Knowing this can help you assess whether your savings will be more durable in an area characterized by a lower average income and subsequently lower costs.

Planning tip. Only nine states tax Social Security benefits. You might want to take note of this as you're considering a move.

Using data to your advantage

The data show that retirement income is far from uniform; it can shift dramatically by age and geography. While median figures provide a powerful benchmark, your ultimate financial success depends on personalizing this information.

Use these age and state-by-state averages not as a final goal, but as a critical reality check. Suppose that your projected income falls below the average for your age or location. In that case, it’s a clear signal to increase savings, optimize your withdrawal strategy to manage taxes or re-evaluate your geographic future.

The time to plan your specific income strategy is now.

Related Content

• The Average Retirement Savings by Age
• Average Cost of Health Care by Age and US State
• Nine Things You Need for a Complete Retirement
• 6 Changes to IRAs, 401(k)s and HSAs in 2026

Individual Retirement Accounts (IRAs) are the foundation of tax-advantaged retirement savings, offering every worker the chance to build wealth outside of a workplace retirement plan. But knowing whether to choose a Traditional IRA (tax break now) or a Roth IRA (tax-free in retirement) requires understanding the crucial differences in contribution limits, income phase-outs, and withdrawal rules.

This 10-question True/False quiz covers the essential facts you need to maximize your annual contributions and avoid costly mistakes. Don't worry if you miss an answer; you can follow the links below the quiz to brush up on your knowledge.

More on IRAs, from the Kiplinger team:

• 6 Changes to IRAs, 401(k)s and HSAs in 2026
• The Average Retirement Savings by Age
• Roth IRAs: What They Are and How They Work
• IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA
• Roth IRA Contribution Limits for 2026
• SEP IRA Contribution Limits for 2026

The coming 2026 changes to IRAs and 401(k)s offer new opportunities to save more for retirement, but you need to understand the new rules. This means keeping track of changes like higher contribution limits and updated requirements for withdrawing money from your accounts.

So, what's on deck for 2026? The major changes coming to retirement plans and accounts in 2026 are primarily driven by the SECURE 2.0 Act and the annual inflation adjustments. The most significant change to be aware of involves catch-up contributions for high earners.

1. Catch-up 401(k) contributions for higher earners over 50 must be made to a Roth

This rule requires that certain high-income earners must make their age 50 and older catch-up contributions to their 401(k), 403(b) or governmental 457(b) plans on a Roth or after-tax basis.

The primary change is a shift from an upfront tax deduction to tax-free withdrawals in retirement. This eliminates a significant pre-tax deduction for high-earners nearing retirement, effectively requiring them to pay income tax on the catch-up portion of their savings now rather than in retirement.

Who is affected? The rule applies to any participant who meets both of the following criteria:

• Age: The participant is age 50 or older or will turn 50 during the year
• Wages: The participant's FICA wages (Social Security wages, typically Box 3 of Form W-2) from the employer sponsoring the plan exceeded $150,000 in the prior calendar year.

If you are a high earner, with over $150,000 in FICA wages in 2025, and are 50 or older, you will no longer be able to deduct your catch-up contributions from your current year's taxable income. That income threshold will be adjusted for inflation in the future.

For affected high-earners, any catch-up contributions — $8,000 in 2026 (up $500 from $7,500 in 2025) —made to their employer-sponsored plan must be designated as Roth or after-tax contributions. High-earners lose the option to make those catch-up contributions on a pre-tax basis.

If your employer's plan does not offer a Roth contribution feature, then all participants who are subject to the high-earner rule will be prohibited from making any catch-up contributions to that plan.

Action to consider now: If you are age 50 or older and your income is close to or over the $150,000 threshold, you should consult with your plan administrator, financial or tax adviser to understand how the mandatory Roth catch-up rule will affect your retirement savings strategy for 2026.

2. 401(k), 403(b), and 457(b) plan contributions go up in 2026

The annual announcement of increased contribution limits for employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and 457 plans, is a critical opportunity for employees to accelerate their savings and secure a stronger financial future.

These higher ceilings allow workers — especially those utilizing catch-up contributions as they approach retirement — to defer more income into tax-advantaged accounts, boosting their potential for long-term compound growth and maximizing their immediate tax benefits.

As the Social Security trust fund is on shaky ground, some experts recommend saving more to cover any potential shortfall. How much more? The experts at Pension Bee suggest people save an additional $138,000 in additional savings to generate the same income if Social Security is reduced, based on the 4% withdrawal rule.

3. Traditional and Roth IRA limits for 2026

While there is no income limit when contributing to a traditional IRA, the ability to deduct that contribution is phased out based on your income and whether you (or your spouse) are covered by a workplace retirement plan.

If you are not covered by a workplace plan but your spouse is, you can still take the deduction, but your joint income will affect it.

If neither you nor your spouse is covered by a retirement plan at work, you are not subject to any income limitations and can take a full deduction for your traditional IRA contributions up to the annual limit, regardless of your Modified Adjusted Gross Income (MAGI).

Here are the contribution limits and MAGI phase-out ranges for making deductible contributions to a traditional IRA for the 2026 tax year:

If only one spouse is covered by a workplace retirement plan, you will have a higher phase-out range. For married couples filing jointly:

• Full deduction if MAGI is: $242,000 or less (up from $236,000 in 2025)
• Partial deduction if MAGI is between: $242,001 and $252,000 (up from a range of $236,001 and $246,000 in 2025)
• No deduction if MAGI is: $252,000 or more (up from $246,001 or more in 2025)

4. Expanded savings for small businesses and the self-employed

For small business owners and the self-employed, the annual increase in retirement plan contribution limits is a powerful development that offers significant opportunities to boost tax-advantaged savings.

The higher contribution ceilings for plans like the SEP IRA, Solo 401(k), and SIMPLE IRA allow business owners to defer greater amounts of income for both themselves and their employees.

This move is key for maximizing retirement readiness, benefiting from larger immediate tax deductions and making their plans more competitive for attracting and retaining talent.

For solo 401(k) accounts. You're also allowed to contribute up to 25% of compensation (after Social Security and Medicare taxes) as the employer profit-sharing contribution. The employer (profit-sharing) contribution limit remains up to 25% of compensation, with an overall compensation cap of $360,000 for 2026.

5. Paper statement requirement

You may find something new in your mailbox in 2026. Defined contribution plans, such as 401(k)s), must provide their participants with at least one paper statement per calendar year, unless the you specifically elect to receive statements electronically. Defined benefit plans must provide one every three years.

6. Health savings accounts (HSAs)

Paying for health care can be challenging before and after retirement. One way to save ahead for medical expenses in retirement is by contributing to a health savings account (HSA) before you enroll in Medicare. These accounts offer a triple tax benefit because contributions are made pre-tax (or are tax-deductible if you contribute after-tax), your contributions grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.

After age 65, you can withdraw funds for any non-medical reason without a penalty; the withdrawals will simply be taxed as ordinary income, similar to a traditional IRA.

The limits below determine if your health plan is eligible to be paired with an HSA.

The catch-up contribution is available to an individual who is age 55 or older by the end of the tax year and is not enrolled in Medicare. If both spouses are 55 or older and not enrolled in Medicare, they can each contribute the $1,000 catch-up amount, but they must do so in separate HSA accounts.

Here are the official contribution limits, minimum deductible and maximum out-of-pocket limits for an HSA-qualified high deductible health plan (HDHP) in 2026:

Tip: You can use HSA distributions to reimburse yourself for your Medicare Part B and D premiums, co-pays, deductibles and coinsurance. However, Medigap premiums aren't considered qualified medical expenses and would be subject to income tax.

2025 year-end deadlines

Take a moment to review your retirement accounts before 2025 ends. See where you still have opportunities to invest or correct some potentially costly errors.

• 401(k) Contribution limits and deadlines. For most 401(k) plans, the deadline to contribute is December 31, 2025. This deadline also applies to participants who are 50 or older at the end of the calendar year 2025.
• IRA Conversion deadline. The deadline for converting a traditional IRA to a Roth IRA is December 31, 2025.
• Excess contributions. If you exceed the 2025 IRA contribution limit, you can withdraw excess contributions from your account by the due date of your tax return (including extensions). If you don't, you must pay a 6% tax each year on the excess amounts left in your account.
• Required minimum distributions (RMDs). Remember that you face an excise tax on any RMD that you fail to take on time. You must calculate the RMD separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs.

Related Content

• Six Changes Coming to Social Security in 2026
• 9 Medicare Changes Coming in 2026
• Nine Things You Need For a Complete Retirement Plan
• New IRS Start Date for Mandatory Roth Catch-Up Contributions

Question: I'm 54 with a $320,000 IRA and am transitioning into self-employment with a projected annual income of $120,000. How much of that can and should I be saving for retirement? What are the best tools for self-employed savers?

Answer: Making the leap from a salaried position to self-employment can be challenging. However, there are also several benefits.

For one thing, being self-employed allows you to work from your location of choice. If you’re 54, you may no longer have the energy to deal with a lengthy commute. As more companies call employees back to the office full-time, transitioning to self-employment could mean getting to work from home and avoiding the hassle of daily commuting.

Or, it may be that you’re moving into self-employment to follow your passion. If you no longer have kids living under your roof and have a solid financial cushion, your mid-50s could be a good time to pursue a line of work you find more rewarding.

If you’re 54 with $320,000 in your IRA, you’re ahead of the game on the retirement savings front compared to the typical American your age. As of the second quarter of 2025, the average IRA balance for savers in their 50s was $129,222.

Still, that doesn’t mean you should necessarily be done saving for retirement. If you were to leave your $320,000 invested at a yearly 8% return until age 67, which is your full retirement age for Social Security, you could end up with around $870,000. That’s a nice-sized nest egg, but you may want more.

Becoming self-employed might make saving for retirement more challenging, at least initially. But it’s important to make it a priority.

Aim to save 15% of your income — once things stabilize

When you’re transitioning into self-employment, you might go through a period of income volatility. It’s okay to pause retirement plan contributions at the onset as long as you commit to starting back up again once your income stabilizes, says Brennan Decima, Founder and Managing Director at Decima Wealth Consulting.

“First, focus on creating six months of cash flow security to give some cushion for your variable income,” he says. “Once that is in place, I suggest to my clients to try and save at least 15% of their income towards retirement.”

Brian Heckert, Founder and Wealth Manager at FSM Wealth, Inc., agrees.

“Having been self-employed for the last 40 years, I have gone from boom to bust with the economy and market cycles,” he says. “Assuming everything is working well, and the $120,000 [annual income] is net of expenses, I would like to see them continue at least as much as they have been saving as an employee — hopefully at least 10-15% of the net income.”

Use the right retirement savings account

Being self-employed gives you more options when it comes to retirement savings plans.

“There are three qualified plan options available for a self-employed person – a Solo 401(k), a SEP IRA, and a SIMPLE IRA,” says Heckert. “All three plans are flexible from year to year, and the contributions can be made up until the tax deadlines.”

If you’re aiming to save 15% of a $120,000 income, or $18,000, all three of these accounts allow for a contribution that large at age 54, Heckert explains.

Decima happens to be a fan of the Solo 401(k) because it gives people “the flexibility of making tax-deductible contributions in years their income is higher, or doing Roth contributions in years where income is low.”

If you’re self-employed and pay yourself a salary, a Solo 401(k) may allow for higher contributions than other retirement plans. However, it’s best to consult a tax professional for advice on your specific situation, as there may be variables to consider outside of your self-employment income.

Make the process automatic

Once you get into a steady income flow, you may want to automate the process of funding a retirement account rather than write your savings a big check at the end of the year.

“It’s really easy to spend money when it comes directly to our bank accounts,” Decima says. “Automating the savings where it goes directly to the 401(k) conditions you to pay yourself first, making it easier to stay on track and reach your future goals."

One thing you may want to consider is automating a baseline contribution each month, and then assessing your net income at the end of each year. If your income allows for more savings, you can always make an additional contribution. But this way, your retirement account will have been funded throughout the year.

Don’t let fear hold you back

If you’ve been a salaried employee for most of your career, giving up the security of a stable paycheck can be daunting. But your 50s are actually a great time to take a chance on yourself, Decima insists.

"I recently left a high-paying job of almost 20 years to start my own company as well,” he explains. “The leap was both revitalizing and intimidating.”

If you end up in a self-employment situation that’s mentally and financially rewarding, it may be something you can continue doing during retirement. That could be a great way to stay busy later in life while boosting your income. In the near term, the key is to give yourself grace with retirement plan contributions initially while you adjust, but then prioritize them as soon as you’re in a good place income-wise.

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Roth conversions, if done right, can lower your tax bill over your lifetime. But be careful. Roth conversions pose traps, and the unwary can easily get caught. Here are eight factors to consider in deciding whether to convert all or part of a traditional IRA to a Roth IRA.

1. Present and future tax rates

A Roth conversion is a taxable event in the year of the switch. So, if you expect that the income tax rate you will pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous.

2. Roths offer several advantages

You can withdraw contributions at any time tax-free. Distributions of Roth earnings are tax-free, provided you are 59½ or older and at least five years have passed since you first put funds in any Roth IRA. Roth IRAs don’t have required minimum distributions (RMDs), so the money can stay in the account, generating tax-free earnings. Also, conversions by the original IRA owner can ease the pain of the 10-year cleanout rule for inherited IRAs. Many non-spouse beneficiaries of inherited Roth IRAs would still have to empty the accounts within 10 years, but the money would be tax-free to them, unlike beneficiaries of traditional IRAs.

3. Multi-year strategy

It’s best to look at Roth conversions as a multi-year planning tool and not as a one-time-only decision. Doing conversions in increments over time helps you space out the tax hit. Review your income and deductions each year and determine with your financial adviser the optimal amount of traditional IRA money to convert so that the conversion doesn’t move you into a higher tax bracket or cause you to lose out on tax breaks.

4. Your adjusted gross income matters

Adjusted gross income, or more specifically, modified adjusted gross income (MAGI), is often used to determine eligibility for certain tax benefits or tax breaks or to determine if you are subject to surtaxes or surcharges. For example, it’s used to see if you qualify for any of these five new temporary tax breaks in the “One Big Beautiful Bill:” The $6,000 senior deduction for people age 65 and older, the $40,000 cap on deducting state and local taxes (SALT) on Schedule A, the deduction for up to $25,000 of tips, the deduction for up to $12,500 of overtime pay, and the deduction for up to $10,000 of car loan interest.

All five tax breaks or benefits begin to phase out at modified adjusted gross income levels above a certain threshold. Your modified adjusted gross income also determines whether you will be hit with the 3.8% surtax on net investment income and whether your Social Security benefits are taxed. You don’t want the additional income from a Roth conversion to cause you to lose deductions and credits you could otherwise be entitled to. Using a multi-year strategy and doing incremental conversions can help you manage this.

5. Medicare premiums

The additional income from a Roth conversion can trigger higher Medicare premiums, known as IRMAA. Individuals with 2023 modified adjusted gross incomes over $212,000 for joint filers and $106,000 for singles pay a monthly surcharge in 2025 for Parts B and D coverage on top of their regular premiums. These figures will rise a bit for 2025 modified adjusted gross income used for figuring 2027 monthly Medicare premium surcharges. Modified adjusted gross income includes income from a Roth conversion.

6. Paying the tax on converted funds

A Roth conversion is treated as a taxable distribution from your traditional IRA when those IRA funds are contributed to the Roth. By default, the IRA custodian will withhold 10% federal income tax. This withheld amount is treated as a distribution to you on which you must pay tax, in addition to the actual money moved to the Roth. In essence, you lose out on a portion of the IRA money being converted into the Roth. This is why financial experts advise you to pay tax owed on the conversion with non-IRA funds, if possible, and you ask the IRA custodian to withhold 0% from the converted funds.

7. IRA owners of RMD age

If you are of RMD age (73 or older for now, though RMD age will gradually rise over the next few years), you must take your annual RMD from your traditional IRA before doing a Roth conversion for the year. This applies whether you convert the full IRA or just a portion. There is another rule for owners of multiple traditional IRAs. You must withdraw your total aggregate IRA RMD for the year before doing a Roth conversion.

8. You can't undo a Roth conversion

Prior to 2018, if you did a Roth conversion, you could undo it and eliminate the tax bill by transferring the funds back to your traditional IRA. This made sense if the Roth lost money shortly after the conversion. Now if you do a conversion, you are stuck with your tax bill.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

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Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. In the Ask the Editor May 9 column, she answered five questions on QCDs. This week, she’s looking at seven more questions on the topic. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Itemizing and doing a QCD

Question: Can I itemize on Schedule A of the Form 1040 and do a qualified charitable distribution (QCD) this year? And does this make sense?

Joy Taylor: People age 70½ and older can transfer up to $108,000 in 2025 from a traditional IRA directly to charity. QCDs can be done only from an IRA, either one that you own or an inherited IRA. You can’t do them from a 401(k) or other workplace retirement plan.

You can itemize on Schedule A and do a QCD, but you can’t deduct the QCD as a charitable contribution on Schedule A. QCDs are nontaxable and aren't included in your adjusted gross income (AGI). And they can count toward your required minimum distribution (RMD), thus reducing the taxable amount of the RMD, provided you do the QCD before withdrawing your full RMD for the year.

Because QCDs aren't included in adjusted gross income, they aren't counted in calculating your 2025 AGI for figuring out whether you would owe monthly surcharges on Medicare premiums for 2027. The fact that QCDs don't increase AGI has even more upside now because of the various new tax breaks in the "One Big Beautiful Bill" (enacted in July 2025) that begin to phase out at modified AGIs above a certain amount. These include the new $6,000 senior deduction for filers age 65 and older, the deductions for up to $25,000 of tips and $12,500 of overtime pay, the deduction for up to $10,000 of interest paid on an auto loan to buy a new vehicle, and the $40,000 cap on deducting state and local taxes on Schedule A. Depending on your circumstances and your income, you might be able to use the QCD strategy to keep your AGI below the various levels.

2. How to do a QCD

Question: I have check-writing privileges on my IRA. If I write a check from my IRA account to a charity and send it to the organization, will this qualify as a QCD?

Joy Taylor: It depends on the IRA custodian. It is true that only transfers from your IRA directly to charity are considered QCDs, but different IRA custodians have their own procedures for complying with this. Some will require that the check goes directly from the custodian to the charity. Others will, at the account owner’s request, have the check written from the IRA account and send the check to the IRA owner to forward to the charity. And others will allow IRA account owners with check-writing privileges to write the check and send it directly to the charity. Check with your IRA custodian to see what it sanctions before doing a QCD.

Note that it’s not acceptable for the custodian to write the check to the IRA owner, who then deposits the money and writes a check from his or her own account to the charity. It’s also not acceptable for an IRA owner with check-writing privileges to write a check from the IRA account to himself or herself and then make a donation to charity.

3. QCDs greater than the annual RMD

Question: I am of RMD age. Does it make sense to donate more money through a QCD over and above my annual RMD amount?

Joy Taylor: The answer depends on several factors. I'll discuss two of them here. First, if you are itemizing on Schedule A, then you would be able to deduct normal charitable contributions (those not made through a QCD). This is tax beneficial because it would reduce your taxable income and the amount of tax you would owe. Note that deducting a charitable contribution on Schedule A would not reduce your adjusted gross income. If you are not itemizing and you want to donate to charity, then doing a QCD over the RMD amount makes lots of sense.

Second, doing a QCD that exceeds your RMD would reduce your IRA balance for figuring RMDs in later years, which is a good thing.

For more information, I would suggest that you discuss with your financial advisor and a tax accountant whether it would be beneficial for you tax-wise to do a QCD in excess of your annual RMD.

4. Deductible IRA contributions and QCD

Question: I have made deductible contributions to my traditional IRA for the past few years. I am now 77. Do all of my post 70½ deductible IRA contributions count against me when attempting a QCD? Also, what about my wife’s post-70½ deductible contributions to her traditional IRA, which I have now inherited because she passed away? Do her deductible IRA contributions count against a QCD?

Joy Taylor: There’s a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP, SIMPLE IRA or a workplace retirement account aren’t affected by this rule.

Let’s take a simple example. A 75-year-old working man is planning to do a QCD for the first time in 2025. For 2021, 2022, 2023 and 2024, he made tax-deductible contributions to his traditional IRA totaling $23,000. In 2025, the man does a QCD and transfers $20,000 from his IRA directly to charity. He would owe income tax on the full $20,000 because it is less than the $23,000 of post-70½ tax-deductible IRA contributions. Let’s say that in 2026, he then transfers another $15,000 to charity directly from his IRA. $12,000 will be a nontaxable QCD, and $3,000 will be treated as a normal distribution.

Any post-2019 deductible contributions made to your IRAs when you were 70½ or older will reduce your allowable tax-free QCD amount until they are used up. Unfortunately, this rule applies to your original IRA and to the IRA you inherited from your wife (so her post-70½ deductible contributions would also reduce the tax-free QCD amount). IRS Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs)” has a QCD worksheet, titled "Appendix D Qualified Charitable Deduction (QCD) Adjustment Worksheet" that includes a line for reducing your QCD amount by the post-70½ deductible contributions made to the IRA.

Note that if you have already done what you thought was a QCD this year, and it turns out it is not a tax-free QCD because of your post-70½ deductible contributions, then the distribution would be taxable to you. But if you itemize, you can take a charitable deduction on Schedule A of your Form 1040.

5. 401(k) contributions and QCDs

Question: I am 76 and still working. I contribute to my employer-sponsored 401(k) account every year. I have also done QCDs from my traditional IRA since I turned 72 and was required to start taking required minimum distributions from the IRA. Can I get the full advantage of my QCDs even though I also contribute to my 401(k)?

Joy Taylor: As discussed in the answer to question 4 above, there is a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP, SIMPLE IRA or a workplace retirement account aren’t affected by this rule, so you don’t need to worry about it. Your 401(k) contributions won’t impact the QCD.

6. Documentation substantiating a QCD

Question: I’m planning to do a QCD for the first time this year. What documentation do I need from the charity to show that I made the donation from my IRA?

Joy Taylor: When you do a QCD, you will want to receive a letter from the charity acknowledging the gift and stating that you didn't receive anything in exchange for your charitable donation. This is similar to what you would receive from a charity if you made a normal charitable contribution of cash. The letter from the charity doesn’t need to specifically state that the donation was made through a QCD, and likely won’t include that language. Also, be sure to keep a copy of the check or electronic transfer you sent to the charity.

7. Reporting QCDs on your tax return

Question: I have a traditional IRA that I currently take RMDs from. Last year, I did a QCD from that IRA for the first time. The Form 1099-R that I received from my IRA custodian doesn’t separate the QCD amount from the remaining RMD. How do I report the QCD on my Form 1040?

Joy Taylor: It is true that if you do a QCD, the Form 1099-R that you receive won’t reflect the distribution as a QCD. It will show only the total amount of your distributions because IRA custodians lack firsthand knowledge to discern whether a particular distribution from a traditional IRA meets the QCD rules. This is normal procedure.

The IRS is aware of this, and the Form 1040 instructions explain how to report the QCD on your tax return. When filling out the 2024 Form 1040, you would include on line 4a the total amount of distributions reported on Form 1099-R. Then you subtract the amount that was transferred directly to charity (the QCD portion) and report the remainder, even if zero, on line 4b. Write “QCD” next to line 4b so that the IRS knows why the numbers don’t match. If using tax software, the program should do this for you once you report the 1099-R distribution and let the program know about the QCD.

For example, here is an explanation from TurboTax: "To report a qualified charitable distribution on your Form 1040 tax return, you'll use the 1099-R (even though there's no indication that it was a QCD). Enter the info as a 1099-R and you'll be asked in one of the follow-up questions if it was a Qualified Charitable Distribution. TurboTax includes the full amount of the distribution reported on your Form 1099-R on line 4a (IRA Distributions) of your Form 1040 or 1040-SR. The taxable amount reported on Line 4b will be the total distribution less the QCD amount and will have 'QCD' entered next to it."

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes related to the One Big Beautiful Bill and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• All Ask the Editor Q&As
• Ask the Editor: Reader Questions on QCDs
• Ask the Editor: Questions on Capital Gains
• Ask the Editor: Questions on Four New Tax Deductions
• Ask the Editor: Questions on Inherited IRAs
• Ask the Editor: Questions on Home Sales and Taxes

For many, funding a 401(k), IRA or other retirement account is the first order of business as they save for long-term goals, and for good reason: These accounts offer significant tax benefits.

But tax-advantaged retirement accounts come with restrictions on how much you can contribute and at what age you can make withdrawals without penalty. A taxable brokerage account adds some flexibility to your mix of investments.

Tax treatment and withdrawal rules

In a taxable brokerage account, you pay tax on interest, dividends and capital gains in the year you receive them.

Capital gains from investments held for a year or less are generally taxed at your ordinary income rate, which can be as high as 37%, while gains on assets held for more than a year are taxed at rates ranging from 0% to 20%, depending on your income. There are no tax deductions for contributions to taxable brokerage accounts.

You don't pay taxes on investments in a tax-advantaged retirement account, however, as long as the money remains in the account. With a traditional IRA or 401(k), you get an up-front tax break on contributions and pay income tax on withdrawals.

With a Roth account, you pay income tax on your contributions, but distributions are tax-free in retirement.

Although taxable brokerage accounts don't offer special tax benefits, you won’t have to worry about contribution limits. So if you're maxing out your retirement plan, a taxable account can be a good place to direct extra savings.

In 2025, the most you can contribute to a 401(k) is $23,500 if you’re younger than 50. Workers ages 50 to 59 or 64 or older can contribute an extra $7,500, and those between 60 and 63 can make catch-up contributions of up to $11,250. The maximum IRA contribution in 2025 is $7,000 ($8,000 if you’re 50 or older).

Thinking of retiring early? You can withdraw money from a taxable brokerage account anytime without facing penalties, so funding a taxable account can provide you with savings to live on until you can tap your retirement accounts.

If you withdraw money from a traditional IRA or 401(k) before you turn 59½, you'll pay a 10% early withdrawal penalty in most cases. (With a Roth IRA, you can withdraw contributions anytime without penalty, but you must own the Roth for at least five years and be 59½ or older to avoid penalties on investment earnings.)

With both taxable brokerage accounts and Roth accounts, you don’t have to take required minimum distributions. If you have a traditional IRA or 401(k), you must take RMDs once you reach a certain age – currently, it's 73 – even if you don't need the money.

Depending on the size of your account, an RMD could push you into a higher tax bracket.

Along with rounding out your retirement portfolio, you can use a taxable brokerage account to save for a variety of other goals, says Cody Garrett, a certified financial planner and founder of Measure Twice Money. You might, for example, invest money to buy a car or a house in a few years.

Getting started

You can open a taxable brokerage account at major brokerage firms such as Charles Schwab, Fidelity Investments and Vanguard; many large banks also offer the accounts through their investment services.

You usually pay no fee to open a brokerage account, and many don't require a minimum investment.

Some firms impose annual account service fees, but they may be waived if you meet certain requirements, such as signing up to receive electronic statements or investing a minimum amount of assets.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on inherited IRAs. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. 10-Year Cleanout Rule

Question: I just inherited a traditional IRA from my aunt. I heard there is a 10-year distribution rule. How does this work?

Joy Taylor: Before 2020, deceased owners of IRAs could leave their accounts to their children, grandchildren or other individual beneficiaries, and those heirs could stretch required minimum distributions (RMDs) from inherited traditional IRAs over their own lifetimes, thus allowing the funds in the accounts to grow tax-free for decades. Congress saw this as a loophole for the rich, and in the 2019 SECURE Act legislation curtailed the break for most non-spousal beneficiaries.

For most non-spousal IRAs inherited after 2019, the IRA funds must be distributed to the beneficiary within 10 years of the owner’s death. So, if an IRA owner dies in February 2025, the beneficiary must clean out the IRA no later than December 31, 2035. There are exceptions for beneficiaries who are surviving spouses or minor children (until age 21) of the account owner, chronically ill or disabled, or not more than 10 years younger than the deceased IRA owner.

If an IRA owner dies before his or her beginning RMD date, and the beneficiary is subject to the 10-year cleanout rule, the beneficiary needn’t take a minimum distribution each year. The beneficiary can immediately cash out, opt to wait until year 10 to get the money, get yearly distributions, or skip years, provided the IRA is fully depleted by the end of the 10-year period.

If an IRA owner dies on or after his or her RMD start date, then the beneficiary must withdraw, at a minimum, annual RMDs from the inherited IRA during the 10-year period, generally beginning with the year after the original owner died, and then fully deplete the IRA by year 10 at the latest. In this situation, the beneficiary generally figures annual RMDs based on his or her own life expectancy, so the younger the beneficiary, the smaller the yearly RMD amounts.

There is relief if the IRA owner died in 2020, 2021, 2022 or 2023. Beneficiaries of IRAs in which the original owner was already subject to RMDs won’t be penalized for not taking distributions in 2021-2024. They needn’t make up for the missed distribution. But they must take an RMD starting in 2025.

2. Inherited Roth IRA

Question: How does the 10-year rule for inherited IRAs apply to inherited Roth IRAs?

Joy Taylor: Similar to the rules for traditional IRAs, many nonspousal beneficiaries of Roth IRAs inherited after 2019 must clean out the account by the end of the 10th year after the owner’s death. But the money is tax-free to them. Also, because Roth IRA owners are not required to take annual RMDs, beneficiaries of inherited Roth IRAs needn’t worry about whether the original account owner died before or after the starting date for taking RMDs. These beneficiaries can opt to clean out the account in year 1, wait until year 10 to take out all the Roth IRA funds, skip years or get annual distributions, provided they fully deplete the Roth IRA within the 10-year period.

3. IRA Inherited Before 2020

Question: I inherited a traditional IRA from my mom in 2017. Does the 10-year cleanout rule apply to me?

Joy Taylor: No. The 10-year cleanout rule applies only to IRAs inherited after 2019, meaning the original IRA owner died in 2020 or later. So you can still do a “stretch IRA,” meaning you can stretch RMDs over your lifetime.

4. IRA Inherited by a Surviving Spouse

Question: In 2022, a 40-year-old woman inherited her late husband’s IRA when he died at age 52. She elected to treat the IRA as an inherited IRA, rather than treating it as her own IRA. Is the surviving spouse subject to the 10-year cleanout rule?

Joy Taylor: It is my understanding that a surviving spouse who elects to treat an IRA as an inherited IRA would not be required to use the 10-year rule to deplete the account. So the woman can stretch RMDs over her lifetime.

5. IRA Beneficiary is Older than the Deceased Owner

Question: A 52-year-old woman passed away in early 2025 and left her traditional IRA to her 54-year-old brother. Does he have to liquidate the IRA within 10 years? Also, can he make withdrawals from the IRA before he turns 59½ without having to pay the 10% early-withdrawal penalty?

Joy Taylor: The 10-year cleanout rule on inherited IRAs doesn’t apply in this case. That’s because the beneficiary was not more than 10 years younger than his sister. So he is considered an eligible designated beneficiary and can stretch annual distributions over his lifetime. He will be subject to regular income tax on the withdrawals, but he won’t have to pay the 10% penalty on pre-age-59½ distributions.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to IRS online accounts, tax credits for buying an electric vehicle and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor: Questions on tax deductions and IRAs
• Ask the Editor: Questions on home sales and taxes
• Ask the Editor: Questions on Hobby Losses, Medicare
• Ask the Editor: Questions on Trump's Big Beautiful Bill
• Ask the Editor: Questions on capital gains

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on paper checks, hurricane deductions, IRAs and timeshare losses (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. The IRS and Paper Checks

Question: I heard that the IRS will no longer accept paper checks from taxpayers after September 30. Is that accurate?

Joy Taylor: Yes and no. President Trump signed an executive order earlier this year mandating that the Treasury Department get rid of paper checks for recipients of benefits, tax refunds and other payments, effective October 1. He is ordering all federal departments and agencies to use electronic funds transfers, including direct deposit, prepaid card accounts and other digital payment options. That means that after September 30, the IRS should no longer be sending out tax refunds in the form of paper checks. There will be limited exceptions.

That executive order also discusses prohibiting people from mailing paper checks to the government, such as when a taxpayer sends in a tax payment via paper check to the IRS. However, it doesn’t appear that the September 30 deadline applies to government receipts, as it does to government disbursements. Instead, the White House executive order doesn’t set a date, but uses the phrase “as soon as practicable” for this purpose.

2. Traditional IRA and Roth IRAs

Question: Can an individual have a traditional IRA and a Roth IRA at the same time, and can they make contributions to both accounts in the same year?

Joy Taylor: Yes, an individual may have a traditional IRA and a Roth IRA at the same time, and the owner can make contributions to both in the same year. However, the aggregate amount of contributions to those IRAs (traditional and Roth) in a year is limited. For 2025, the IRA contribution limit is $7,000 ($8,000 if you are 50 or older). For example, if you are 55 and contribute $3,000 to a traditional IRA in 2025, you can only contribute up to $5,000 to a Roth IRA in 2025.

Note that you must also have compensation, such as wages or self-employment earnings. And there is an income ceiling on making contributions to a Roth IRA. For 2025, the ability to make contributions to a Roth IRA phases out at adjusted gross incomes of $236,000 to $246,000 for joint filers and $150,000 to $165,000 for single filers. This income ceiling doesn't apply to contributions to a traditional IRA.

3. Prior-Year Hurricane Losses

Question: I live in Florida, and in 2022, my home suffered serious damage from Hurricane Ian. I’ve heard the government has recently changed the deduction for disaster losses. But I already filed my 2022 tax return in early 2023. How can I take advantage of this change?

Joy Taylor: Personal casualty losses can be deducted to the extent the losses are attributable to federally declared disasters, such as hurricanes, earthquakes, wildfires, blizzards or flooding, that affect a wide area. Individuals can deduct personal losses on their Form 1040 to the extent not reimbursed by insurance. Your loss is equal to the smaller of the damaged property’s adjusted basis or decline in value, less any insurance proceeds you received or expect to receive.

Legislation passed by Congress last year has tax easings similar to those given to victims of federally declared disasters in 2018-2020. The relief generally applies to disasters that took place in 2021-2024. This would include damage to your home from Hurricane Ian. The law lets individuals deduct personal disaster losses even if they don’t itemize on Schedule A. You can write off uninsured personal losses in excess of a $500 threshold without regard to the "10% of adjusted gross income" offset that generally applies to disaster loss deductions. This net loss is treated as an additional standard deduction for nonitemizers.

Since you have already filed your 2022 Form 1040, you can amend it to take the more generous disaster loss deduction by filing Form 1040-X. Note that you generally have three years from the date you filed your original return to file Form 1040-X to amend your return. If you filed your original return before the April 15 due date, then you have three years from the original April 15 due date to file an amended return. For example, if you filed your 2022 return on March 24, 2023, you have until April 15, 2026, to amend it. When amending your return, you would use Form 4684 to calculate the loss. Follow the instructions on Form 4684 for reporting a “qualified disaster loss.”

4. Selling a Timeshare

Question: I own a timeshare, and I am thinking of selling it. Will I have to pay federal income tax on the sale?

Joy Taylor: Most people who sell a timeshare sell it at a loss. Losses from sales of timeshares held for personal use are nondeductible. If you’re one of the lucky few that sells a timeshare at a profit, you will have capital gain equal to the sales price less your tax basis in the timeshare. Different tax rules apply to sales of timeshares held for rental or mixed personal/rental use.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to inherited IRAs, energy upgrades made to a home and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor: Questions on Tax Deductions and IRAs
• Ask the Editor: Questions on Home Sales and Taxes
• Ask the Editor: Questions on Hobby Losses, Medicare
• Ask the Editor: Questions on Trump's Big Beautiful Bill
• Ask the Editor: Questions on capital gains

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on deductions, tax proposals and IRAs. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Brokerage Management Fees

Question: I pay over $6,000 in management fees on my brokerage account. Can I deduct these fees?

Joy Taylor: Unfortunately, an individual cannot deduct management fees paid on a brokerage account (unless it's part of the taxpayer's trade or business). According to IRS Publication 529, Miscellaneous Deductions, “[i]nvestment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income are miscellaneous itemized deductions and are no longer deductible.”

These types of investment expenses used to be deductible as a miscellaneous itemized deduction on Schedule A of the Form 1040, subject to the 2%-of-adjusted-gross-income limit. But the 2017 Tax Cuts and Jobs Act (TCJA) temporarily eliminated that entire group of deductions through the end of 2025. Republican lawmakers are currently negotiating a big tax package, and both the House and Senate's versions of the “One Big Beautiful Bill” would permanently eliminate the deduction.

2. Bonus Senior Deduction

Question: I heard that Congress is going to give senior citizens an extra income tax deduction. Is this true, and how much is the tax break?

Joy Taylor: The House’s version of the “One Big Beautiful Bill” would give a new $4,000 bonus deduction to individuals 65 and up. Married couples with both spouses 65 or older would be able to deduct $8,000 on a joint return. The proposal would first take effect on 2025 federal tax returns filed next year and end after 2028. The deduction would begin to phase out for taxpayers with modified adjusted gross incomes over $150,000 on joint returns and $75,000 on single and head-of-household returns. The Senate’s version of the “One Big Beautiful Bill” also proposes a bonus senior deduction, but the amount would be $6,000 per filer age 65 and up.

Both versions would require filers taking the deduction to have Social Security numbers.

3. IRA Contributions and Taxable Compensation

Question: I am a semi-retired minister for a small church, and I receive a nontaxable housing allowance and a small amount set aside for my pension. I do not receive any salary. I am also receiving Social Security benefits. Can I contribute to an IRA?

Joy Taylor: You must have taxable compensation to contribute to a traditional IRA or a Roth IRA. IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) (pages 6 and 7), sets forth how to meet this requirement. Your housing allowance would not be considered compensation for purposes of IRA contributions because you do not pay federal income tax on the allowance. Also, your Social Security benefits aren’t considered compensation for this purpose, even if you pay income tax on a portion of your benefits.

Since you don’t have taxable compensation, you would not be able to contribute to a traditional IRA or a Roth IRA.

4. IRA and Basis

Question: A husband and wife both had traditional IRAs, and both have been taking their required minimum distributions. They each have basis in their IRAs derived from making nondeductible contributions prior to retirement. They have been reporting their basis on two Forms 8606 every year. The husband died in 2025, and the wife rolled his IRA into hers. Both have taken their RMDs in 2025. The widow will file a joint return for 2025. But what should the widow do when she files her single return for 2026? How can she get credit for the remaining basis from the deceased spouse?

Joy Taylor: IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), discusses inheriting an IRA with basis. Here is the relevant language:

"IRA with basis: If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you can't combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions."

In the situation you are asking about, the wife treated her deceased husband's IRA as her own when she rolled it into her own IRA. As a result, based on the language above, it seems that she can combine his basis with the basis that she had in her traditional IRA.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to Roth IRA conversions, inherited IRAs and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor: Questions on Home Sales and Taxes
• Ask the Editor: Questions on Hobby Losses, Medicare
• Ask the Editor: Questions on Trump's Big Beautiful Bill
• Ask the Editor: Questions on capital gains
• Ask the Editor: Questions on tax deductions and losses
• Ask the Editor: Questions on 529 plans

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on qualified charitable distributions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1: QCDs and 401(k)

Reader Question: Can I make a qualified charitable distribution (QCD) from my 401(k) this year?

Joy Taylor, Editor, The Kiplinger Tax Letter
No, QCDs cannot be done from a 401(k) or other workplace retirement plan. A QCD can only be done from an IRA.
People age 70½ and older can transfer up to $108,000 in 2025 from a traditional IRA directly to charity. QCDs can count as all or part of your required minimum distribution (RMD), but they are not taxable, and they are not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers not itemizing because of higher standard deductions.

2: How to do a QCD

Reader Question: Someone told me that the only way I can do a QCD is for my IRA custodian to directly transfer the money from the IRA account to the charity. Is this true?

Joy Taylor, Editor, The Kiplinger Tax Letter
It depends on the IRA custodian. It is true that only transfers from your IRA directly to charity are considered QCDs, but different IRA custodians have their own procedures for complying with this. Some will require that the check go directly from the custodian to the charity. Others will, at the account owner’s request, have the check written from the IRA account and send the check to the IRA owner to forward to the charity. Vanguard, for example, allows this second approach. Both procedures work for QCDs. What is not acceptable is for the custodian to write the check to the IRA owner, who then deposits the money and writes a check from his or her own account to the charity.

3: Charitable Gift Annuity

Reader Question: I’ve been receiving requests from my alma mater about doing a QCD through a charitable gift annuity. I thought QCDs could only go to a section 501(c)(3) charity. Have the rules changed?

Joy Taylor, Editor, The Kiplinger Tax Letter
As a general rule, in a QCD, the money must generally go to a section 501(c)(3) organization. The 2022 SECURE 2.0 legislation provided an easing to this. It allows IRA owners to do a one-time (not annual) QCD of up to $55,000 for 2025 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges with charitable gift annuity programs are touting the QCD option. If you already did this in 2023 or 2024, you can’t do it again.

4: Deductible IRA Contributions

Reader Question: I am working and made a tax-deductible contribution of $3,500 to my traditional IRA in 2024. I also did a QCD that year. My accountant told me that I don’t get the full advantage of the QCD because I also contributed to my IRA. Is that true?

Joy Taylor, Editor, The Kiplinger Tax Letter
Yes. There’s a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP or SIMPLE IRA aren’t affected.
Let’s take a simple example:
A 75-year-old working man is planning to do a QCD for the first time in 2025. For 2021, 2022, 2023 and 2024, he made tax-deductible contributions to his traditional IRA totaling $23,000. In 2025, the man does a QCD and transfers $20,000 from his IRA directly to charity. He would owe income tax on the full $20,000 because it is less than the $23,000 of post-70½ tax-deductible IRA contributions. Let’s say that in 2026, he then transfers another $15,000 to charity directly from his IRA. $12,000 will be a nontaxable QCD, and $3,000 will be treated as a normal distribution.

5: What's the maximum QCD for spouses?

Reader Question: My wife and I want to max out donations from our IRAs to charity this year. What is the maximum QCD we can make for 2025?

Joy Taylor, Editor, The Kiplinger Tax Letter
$108,000 per IRA owner. Since you are married, you and your spouse can each potentially give up to $108,000 in QCDs from your separate IRAs, making the maximum QCD $216,000, provided each of you has substantial amounts in your IRAs. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your QCD cap is limited to $70,000, and your wife’s QCD cap is limited to $108,000. Your wife won’t be able to make a QCD of $146,000 to make up for the deficit.

About Ask the Editor, Taxes

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to charitable contributions, gifts and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

Are you thinking of converting your traditional IRA to a Roth IRA? Now might be a good time to consider it. But before you pull the switch, there are lots of factors you will want to consider when it comes to Roth conversions, ranging from the possibility of future tax rate changes to whether the conversion will subject you to higher Medicare premiums and everything in between. Below, we discuss nine important factors to keep in mind when deciding to do a Roth conversion.

1. Present, Future Income Tax Rates

When you convert a traditional IRA to a Roth IRA, you will have to pay income tax on the conversion for the year you do the switch. But once the money is in the Roth IRA, future earnings and distributions that you take from the account are generally tax-free. So present and future income tax rates are key to deciding on whether a Roth conversion makes sense to you.

If you expect the income tax rate that you will pay in retirement will be equal to or higher than the rate in the year of the Roth conversion, then switching to a Roth IRA can pay off from a tax perspective. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous.

Federal income tax rates are low right now, and we think they will stay low for a while. Although the lower rates enacted in the 2017 Tax Cuts and Jobs Act are set to expire at the end of this year, it's widely thought that President Trump and congressional Republicans will extend them in their one big, beautiful bill.

We have heard that Republican lawmakers are mulling whether to impose higher taxes on millionaires. There's been chatter that some GOPers want to bring back the 39.6% top federal income tax rate for people who report $1 million or more of income. The revenues from this proposal could be used to help offset other tax cuts that lawmakers want, such as no tax on tips or overtime pay. It's too soon to know whether this tax hike proposal will come to fruition. Naysayers argue that raising income tax rates on individuals is anathema to the views of the Republican Party.

2. Distributions From Roth IRAs

Roth IRAs are more flexible than traditional IRAs when it comes to withdrawing funds, as you can see here:

• You can withdraw your contributions from Roth IRAs at any time without having to pay income tax.
• Distributions of earnings from Roth IRAs are free of income tax, provided you are 59 1/2 or older when you take the distribution, and at least five years have passed from the year that you first put funds in any Roth IRA that you own, either by contribution or through a Roth conversion.

3. Don't Use IRA Funds to Pay Tax on the Conversion

As we already discussed, you are responsible for paying the income tax on the Roth conversion for the year you do your switch. An important tip to keep in mind is that you should not use funds within your IRA to pay the tax on the conversion.

A Roth conversion is treated as a taxable distribution from your traditional IRA to you followed by a contribution of those funds to your Roth IRA. The custodian of your traditional IRA will by default withhold 10% federal tax from the converted funds. This withheld amount is treated as a distribution to you on which you have to pay tax, in addition to the remaining funds that you move to the Roth. That is why experts advise paying tax owned on a Roth conversion with non-IRA funds and requesting that the custodian withhold 0% on the conversion.

4. Roth IRAs Don't Have RMDs

There are no required minimum distributions for owners of Roths. So if you don't otherwise need the money from your Roth IRA while in retirement, you can let it continue to grow tax-free within the Roth.

Keep in mind, though that if you are subject to RMDs from your traditional IRA, you must first take your annual RMD from your traditional IRA in the year of the switch before you do the Roth conversion.

5. The 10-Year Cleanout Rule For Inherited IRAs

For most non-spousal beneficiaries who inherit an IRA after 2019, the IRA funds must be distributed to that beneficiary within 10 years after death. So, if an IRA owner dies in March 2025, the beneficiary must clean out the IRA no later than December 31, 2035.

This 10-year cleanout rule applies to beneficiaries of traditional IRAs and Roth IRAs, but there are a couple of key distinctions. First, beneficiaries of inherited Roth IRAs don't have to pay tax on the distributed funds, unlike beneficiaries of traditional IRAs. Second, beneficiaries of Roth IRAs needn't take an annual RMD from the inherited Roth account during the 10-year period. Many beneficiaries of traditional IRAs have to take an annual RMD in each of the 10 years if the original IRA owner died on or after his or her beginning RMD date.

6. Higher Medicare Premiums

IRA owners who do a Roth conversion will report income from the conversion on their federal tax return for the year of the switch. This additional income from converting might trigger higher Medicare premiums if you have Medicare.

Medicare participants with modified adjusted gross incomes over a certain amount pay a monthly surcharge for Parts B and D coverage on top of their regular monthly premiums. In determining 2025 Medicare premiums, the government looked at modified AGI reported on 2023 federal income tax returns. If your modified AGI on your 2023 return was higher than $212,000 for joint filers or $106,000 for single filers, then you are paying a monthly premium surcharge this year for Medicare Parts B and D coverage on top of your regular monthly premium. The surcharge amount increases as your income goes up.

The modified AGI amounts are indexed each year for inflation and will be slightly higher for the 2025 modified AGI used for figuring the 2027 monthly Medicare premium surcharges. Income from converting from a traditional IRA to a Roth IRA is included in the calculation of modified AGI.

7. Value of Investments In Your IRA

Converting to a Roth IRA can pay off if you expect that the assets in your IRA will soar in value. The same rationale applies if you have assets in your traditional IRA that are now depressed in value. For example, Roth conversions are sometimes more popular when there is a downturn in the market.

8. Partial Conversions

There is nothing in the tax law that requires you to convert all of the funds in your traditional IRA to a Roth IRA at one time. You can do Roth conversions in increments over time to space out the income tax hit on the conversion. For many IRA owners, a series of partial conversions over the years might be a more effective strategy.

9. You Can't Undo a Roth Conversion

Prior to 2018, if you converted all or part of a traditional IRA to a Roth IRA, you had until Oct. 15 of the year following the conversion to undo the switch and eliminate the tax bill by transferring the funds back to a traditional IRA. This is called a recharacterization and usually made sense if the Roth IRA lost money shortly after the conversion. The 2017 Tax Cuts and Jobs Act ended recharacterizations of Roth conversions. So if you do a Roth conversion, you are stuck with your original income tax bill, even in cases where your Roth IRA assets go down in value soon after the conversion.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

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Tax refunds aren’t free money — they’re your money. While most people use tax refunds to pay bills or build savings, there’s an overlooked strategy that could significantly boost your long-term wealth: investing your refund into a traditional IRA.

As CEO of PensionBee, I’ve seen how easy it is to put retirement savings on the back burner. But I’ve also seen how small, strategic decisions — such as using a tax refund to fund an IRA — can lead to a much stronger financial future.

This tax season, rethink what’s possible. Instead of spending your refund, make it work for your future.

A smarter strategy for your refund

The average tax refund this year, according to IRS data through March 7, is $3,324. Many see a high refund as a financial boost, but in reality, it’s money you overpaid throughout the year.

Ideally, you’d adjust your withholdings to keep more of your paycheck. Especially if it’s money you could use throughout the year to cover essential costs.

But if you do get a refund, the question is: What’s the smartest way to use it?

Insight into Americans’ use of their tax refunds typically reflects a desire to spend money on essentials like bills, groceries, savings and debt repayment. Only a few consider retirement — and that’s a missed opportunity.

A traditional IRA offers a unique tax advantage: Contributions lower your taxable income, reducing how much you owe and often increasing your refund. That means reinvesting your refund into your IRA creates a powerful cycle of tax savings and compounding growth.

How an IRA contribution saves you money today

Traditional IRAs aren’t just about your future security — they can put money back in your pocket now. Here’s how:

• Your employer withholds taxes based on estimated income, but IRA contributions throughout the year can change that calculation in your favor.
• This happens because IRA contributions reduce your taxable income, often leading to a lower tax bill or bigger refund.
• The IRS rewards retirement savers who use traditional IRAs with deductions that can drop your taxable income, helping you keep more of your hard-earned money.

By simply funding a traditional IRA, you create a tax benefit. Once you receive your tax refund … that’s when the real magic happens: You can reinvest it in your IRA. It’s here that you unlock the real potential of your money.

The power of compounding: Turn a refund into real wealth

Your traditional IRA is an investment vehicle for your personal retirement savings. At PensionBee, we make it easy for you to invest in your IRA by offering five simple portfolio options. Each is designed to benefit from long-term market gains.

Historically, the average rate of return for an IRA is about 5% without accounting for inflation. That’s where the real opportunity lies. It means that each year that you get a return on your initial investment, you also get a return on your return.

Over time, this creates exponential growth.

Here’s an example:

• If you contributed the average tax refund amount of $3,324 into an IRA today, assuming a standard 5% return (without inflation) and an average 0.85% management fee, it could grow 50% to $4,992 in just 10 years.
• In 15 years, you would have made nearly 85% of your original refund check, landing you at $6,117, and in 17 years, your money would double.
• In 25 years, you’d have $9,186.
• In 35 years, you’d have $13,795.

And that’s just one year’s refund. Imagine doing that every year. The impact could be game-changing.

Retirement security is financial security

America’s financial picture can appear stark. Millions of Americans supplement their income with high-interest debt. Nearly two-thirds of Americans feel like they live paycheck to paycheck — including high earners.

While many people understand the benefit of paying off credit card debt and building up emergency savings, few recognize the immediate impact of a retirement account on financial well-being.

However, the retirement picture is just as worrisome.

According to the Survey of Consumer Finances (SCF), roughly 1 in 2 households (46%) have no retirement savings at all. Worse, 7 in 10 American workers are not confident that they will be able to retire or retire on their chosen timeline.

Younger generations, struggling to cover day-to-day costs, have largely deprioritized retirement. For example, only 1 in 5 Gen Zers has started saving for retirement, while about the same percentage of them believe they’ll never retire.

Even though the retirement landscape is undoubtedly changing with discussions around Social Security legislation and the SECURE 2.0 Act, what hasn’t changed is the role of retirement accounts in securing broader financial prosperity.

Make your taxes work for you

A tax refund isn’t a windfall — it’s your money. Used wisely, it can be a powerful tool to build wealth. By contributing to an IRA, you power your tax bill today and set yourself up for a stronger financial future.

Instead of treating your refund as a bonus, think of it as an investment opportunity. Make this tax season the one where you take control of your retirement savings — and reap the benefits for decades to come.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Most people are familiar with the laws that protect 401(k) plans from bankruptcy and insurance that protects individual deposit accounts from bank failures. But are there any federal protections for individual retirement accounts (IRAs)? The short answer is yes.

The Employee Retirement Income Security Act (ERISA) protects 401(k) plans from employer and employee bankruptcies, and the Federal Deposit Insurance Corporation (FDIC) insurance protects up to $250,000 in individual deposit accounts from bank failures.

For IRA holders, there are limited protections in place through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Before its enactment, IRA holders relied solely on state law to shield their assets.

Now, the extent of the protection will be dictated by what type of IRA you have and the statutory maximum amount of IRA funds that can be excluded from a bankruptcy estate. As the number of bankruptcies rises, understanding the protections your IRA enjoys can give you some leeway to reorganize your finances.

How many people have filed for bankruptcy?

Total bankruptcy filings rose 13.1% during the 12 months ending March 31, 2025. Non-business, or individual bankruptcies, rose 13.0% to 505,771, compared with 447,458 in 2024, according to statistics released by the Administrative Office of the U.S. Courts.

The Consumer Bankruptcy Project (CPB) found that the median age of those filing for bankruptcy was 49. And people 65 and older filing for bankruptcy have become the fastest-growing demographic group over the past 20 years. This group has grown from 4.5% of bankruptcy filers in 2001 to 18.7% of filers by 2022. This is partially a result of the growing number of people 65 and older in the U.S., which increased 38.6% between 2010 and 2020, according to Debt.org.

New York’s eastern district recorded the highest percentage of repeat filers, 54%, with Utah close behind at 52%. North Dakota and Puerto Rico had the lowest number of repeat filers filing Chapter 13, at 13% and 16% respectively.

Why are people filing for bankruptcy? In one survey, 78% of respondents cited a decline in income as a reason, and 65% reported that their bankruptcy filing stemmed from medical debts and missed work due to illness.

Protections for IRAs under BAPCPA

Knowing if your particular IRA account is protected is important because not all retirement accounts share the same type of creditor protection. This is becoming a more pressing concern as the number of people filing for bankruptcy is rising generally and the number of people filing over age 65 has grown substantially.

ERISA provided federal bankruptcy protection for 401(k) plans and traditional pensions before the passage of BAPCPA. Previously, IRA protections were defined at the state level, if at all. After the law's passage in 2005, IRA account holders in every state were afforded some form of bankruptcy protection for their assets.

When you apply for bankruptcy, you are required to liquidate your assets to repay your creditors. If you file for a Chapter 7 or a Chapter 13 bankruptcy, certain property is exempt from entering the estate. These estate exemptions are typically governed by state law, but the federal bankruptcy code does include an exemption list for states that do not have their own. This estate, a collection of your nonexempt assets, is used to repay your creditors.

Limits on IRA protection

For 2025-2028, under BAPCPA, Roth and traditional IRA balances are exempted from the bankruptcy estate up to $1,711,975That is an increase of $199,165 from the previous limit of $1,512,350. This increase went into effect on April 1, 2025. Any amounts over the limit will be included in the petitioner's bankruptcy estate.

This exemption amount is subject to cost-of-living adjustments (COLAs) and is adjusted for inflation every three years. The next time the exempted amount can go up is in April of 2028.

Remember that the $1,711,975 does not include funds rolled into the IRA, such as from a 401(k). Former employer plan dollars remain 100% protected from bankruptcy within the IRA and do not reduce the $1,711,975 cap.

Rollovers from employer-sponsored retirement plans. Eligible rollover distributions retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well. However, in non-bankruptcy situations, state laws apply to IRA assets, including rollover IRAs.

Inherited IRAs. If you file for bankruptcy and have an inherited IRA, those funds can be taken by creditors. This is true even though retirement funds are often exempt in bankruptcy filings. The protection does not apply when you inherit an IRA, except in one case — when you inherit from a spouse.

While you may read that the status of inherited IRAs is unclear, in June 2014, the U.S. Supreme Court ruled unanimously, 9-0 in Clark v. Rameker, No. 13-299 (U.S. 6/12/14), that inherited IRAs are not protected in bankruptcy under federal law; upholding a Seventh Circuit decision, that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.

Non-bankruptcy situations

In non-bankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law. This provision prevents the assignment or transfer of pension benefits to third parties, ensuring funds are protected for retirement. That is not the case for IRAs; for anything other than a bankruptcy, state law determines whether IRA assets will receive protection from creditors’ claims. And many states have strong creditor protections for IRAs, SEPs, and SIMPLE IRAs.

Neither BAPCPA nor ERISA provides absolute protection from all claims. Exceptions apply to: federal criminal fines, back taxes and penalties, court orders related to divorce, child support, and qualified domestic relations orders (QDROs).

Creditors can't get your IRA, but Uncle Sam can still tax you on it

The enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) put IRAs out of the reach of bankruptcy creditors and gave account holders a way to protect their retirement funds in hard times. Remember that any qualified retirement plan or IRA, including traditional, Roth, rollovers, SIMPLE, or SEP IRAs, may be subject to an IRS tax levy. The government rarely puts your money beyond reach.

Employees in qualified retirement plans protected by ERISA should consider the degree of creditor protection when deciding to keep their accounts under an ERISA plan or rolling over accounts to an IRA. If you want to move the money out of a former employer’s plan, you can move it into your new 401(k) retirement plan and keep the bankruptcy and creditor protections afforded by ERISA.

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Did you max out your 2025 IRA contribution limit? If not, plan carefully to get the most out of your retirement accounts. You still have until April 15, 2026, to make a contribution to your Roth and traditional IRAs for 2025 before you start using your 2026 limit. Read on for 2025 and 2026 contribution limits.

IRAs have become even more valuable tools for retirement savings in the years since employers began moving away from traditional pensions. As companies shifted to defined contribution plans such as 401(k)s, workers needed new ways to save for their future, increasing the importance of savings opportunities outside the scope of employment.

The Employee Retirement Income Security Act of 1974 (ERISA) established the IRA account, and by 1975, workers who had no access to employer-sponsored retirement plans could contribute up to $1,500 per year. Over the years, the number of people eligible to contribute to an IRA has grown, as have the types of IRAs available.

By mid-2023, 55.5 million (or 42.2%) U.S. households reported owning individual retirement accounts (IRAs), according to a 2023 ICI report on The Role of IRAs in US Households’ Saving for Retirement. IRA accounts held $14.5 trillion at the end of June 2025, over one-third of total retirement assets of $40 trillion.

The following tables provide a quick overview of contribution limits, income thresholds, and rollover rules for Roth, traditional, SIMPLE and SEP IRAs. For deeper planning advice and detailed regulations, follow the links provided in each section.

Consider the backdoor Roth option if your income exceeds the limit.

If you earn too much to contribute to a Roth IRA, all may not be lost. You can still access these accounts indirectly through a backdoor Roth IRA.

Creating a backdoor Roth IRA is a two-step process. First, you open a traditional IRA using after-tax dollars instead of the pre-tax money you usually fund these accounts with. Then, you convert the traditional IRA to a Roth, but because none of the contributions were deductible, no income tax is owed on the conversion.

While there are no income limits for setting up a nondeductible IRA or making a Roth conversion, contributions through the back door have the same annual limit in 2025 and 2026. For more information, read Backdoor Roth IRAs: Good for Wealthy Retirees? and get up-to-speed on the pro-rata rule and how to manage withdrawals.

A non-deductible IRA

A non-deductible IRA isn’t a type of retirement account; it refers to nondeductible contributions that you make to a traditional IRA. It’s a retirement savings strategy for those whose income exceeds the limits to make deductible IRA contributions or to contribute to a Roth IRA. You will need to file a Form 8606 for every year you made nondeductible IRA contributions

But be aware that making nondeductible contributions to a traditional IRA will complicate your life when it comes time to withdraw funds from your IRA. Why? Because each withdrawal from that traditional IRA will be a combination of your nondeductible contributions, your tax-deductible contributions and all their earnings. And as you take distributions, the ratio will change. How to Calculate Tax-Free and Taxable IRA Withdrawals can give you a clearer picture of how the process works.

SEP Plan criteria for eligible employees and contribution limits

Requirement for equal contributions. SEP plans provide some flexibility to employer owners when cash flow is tight. There's no requirement or obligation for the business owner to make contributions each year, but when they do the percentage of income contributed to a SEP IRA must be the same across all eligible employees, including the owner.

Eligibility to contribute to a SEP IRA. Unlike other retirement plans, there are specific criteria for being eligible to have a SEP IRA as an employee.

You must:

• Be age 21 or older
• Meet the 3-of-5 rule, meaning you've been employed full time by the company for any period of time during at least 3 of the last 5 year
• Earn the minimum annual compensation from the SEP IRA-sponsoring employer. For 2026 that is $800 and $750 for 2025.

A company may exclude the following from its SEP IRA:

• Employees that are covered by a union collective bargaining agreement for retirement benefits
• Employees who are not U.S. residents and do not receive US wages.

SIMPLE Employer (Mandatory) Contribution Limits

SIMPLE IRAs operate differently than other IRAs. And it's important to note that employees cannot make SIMPLE IRA contributions on their own behalf. SEP IRA contributions are made by the employer/business owner rather than by individuals/employees, and contribution amounts are determined by the business, subject to IRS limits.

Another unique feature of a SIMPLE IRA plan is that the percentage of income contributed by an employer/owner to a SIMPLE IRA must be the same for all eligible employees, including the owner. For the 2025 tax year, the deadline to contribute to a SIMPLE IRA is April 15, 2026, or the business's tax filing deadline, including extensions up to October 15, 2026.

An employer must contribute to a plan and can choose either of the following SIMPLE IRA employer match rules:

• Make a non-elective contribution of at least 2% of compensation for all eligible employees. You may limit these non-elective contributions to eligible employees earning at least $5,000, although you do not have to do so. Maximum compensation for 2026 is $360,000 and $350,000 for the 2025 tax year.
• Make a matching contribution of 100% up to the first 3% of compensation.  Employees only get this matching contribution if they contribute to the plan.
• Allow additional nonelective contributions to SIMPLE IRA plans. Section 116 of the SECURE Act 2.0 allows employers to make additional contributions to their employees “in a uniform manner,” as long as the contribution does not exceed either up to 10 percent of compensation or $5,000, whichever is less.

SIMPLE IRA deadlines

SIMPLE IRAs have set-up deadlines and contribution deadlines.

Setup deadline: A plan cannot have an effective date later than October 1 for current-year contributions.

Contribution deadline: Employers must make contributions by the business's tax-filing deadline. They must deposit salary deferral contributions from employees no later than 30 business days after the end of the month they were deferred.

Employers are required to make annual contributions to a SIMPLE IRA plan. At minimum, an employer must either match employee contributions, up to 3% of compensation (and no less than 1%), or contribute up to 2% of compensation for all eligible employees, regardless of whether the employee contributes.

Here are some important rules and limitations about rollovers:

Number of rollovers: the once-per-year rollover rule. You can only make one 60-day indirect rollover, where you receive a check from an IRA and deposit it into another IRA within 60 days, from all of your IRAs (including Traditional, Roth, SEP, and SIMPLE IRAs) within a 12-month period.

Three exceptions to the once-per-year rollover rule. This rule doesn't apply to: (1) trustee-to-trustee transfers — direct transfers of funds between IRA custodians, (2) rollovers to/from qualified plan — rollovers from or to 401(k)s, 403(b)s, etc. and (3) Roth conversions — converting a Traditional IRA to a Roth IRA.

Rollovers from pre-tax accounts to a Roth IRA. If you rollover funds from a traditional, SIMPLE or SEP IRA to a Roth IRA, you will have to include the rollover amount on your tax return and pay income taxes.

Limitations on rollover to SIMPLE IRAs. Rollovers into a SIMPLE IRA from traditional and SEP IRAs, as well as employer-sponsored retirement plans, applies only to contributions made after December 18, 2015. Contributions made prior to that date are ineligible to rollover into a SIMPLE IRA.

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Remember when you first started saving for retirement with a tax-deferred investment plan? Back then, the idea of putting your savings into a traditional IRA, 401(k) or similar retirement plan probably seemed almost too good to be true.

An account that reduces your taxable income upfront while also offering tax-deferred investment growth? Who wouldn’t see the appeal?

Especially if you thought your income tax rate would be lower in retirement — when your kids were grown, your mortgage was paid off and your income needs were reduced.

Unfortunately, for many people, this just isn’t true. Though studies show that many people do pay a lower tax rate in retirement, the widely held belief that life will be less expensive than when you were working doesn’t apply to everyone.

Reasons for higher taxes in retirement

Today’s retirees want a more active — and, therefore, more costly — lifestyle than past generations. That might include travel, a golf club membership or the purchase of a second home. To meet this living standard, those retirees often need the same or even more income than when they were working.

Today’s retirees also live longer, which can mean higher medical and long-term care costs later in life. And if they’re pulling a major chunk of those funds from a tax-deferred account every year, it may keep them in a much higher tax bracket than they ever expected or planned for. Here’s why:

Every distribution you make from a tax-deferred account is taxed as ordinary income.

Savers sometimes forget that Uncle Sam is a silent partner in their 401(k) or IRA — and he’s been waiting a long time to get his share of that money. Depending on the tax bracket you’re in when you withdraw your funds each year, you could find yourself handing over a sizable portion of your nest egg to the IRS.

Distributions from tax-deferred accounts can trigger other taxes in retirement.

Until it became a topic of interest in the recent presidential campaign, many soon-to-be retirees were unaware that they could pay taxes on a percentage of their Social Security benefits.

Benefits aren’t subject to taxes unless your provisional income (your gross income plus 50% of your Social Security benefits plus any tax-exempt interest you’ve received that tax year) exceeds IRS thresholds.

But a large distribution from a tax-deferred account could easily push your income over those limits, which may have been set decades ago and haven’t been adjusted for inflation.

You also could end up paying the income-related monthly adjusted amount (IRMAA), a surcharge that high-income beneficiaries may be required to pay for Medicare parts B and D. The amount you owe in state taxes could be affected as well.

The IRS won’t allow you to keep the funds in your account indefinitely.

Even if you avoid tapping your tax-deferred accounts early in retirement, the start of required minimum distributions (RMDs) at age 73 can lead to a sudden and unwanted surge in taxable income for diligent savers.

The more you have stashed away in tax-deferred accounts, the more you can expect to pay.

Tax diversification can give you options

There’s a common saying in finance that it’s not how much you make that counts, it’s how much you keep. In other words, when it comes to your investment portfolio, it’s important to balance risk and reward with a diverse mix of stocks, bonds, cash and other assets.

What retirement savers don’t always understand is that the same principle applies to taxes. Using an appropriate mix of fully taxable, tax-advantaged and tax-free accounts could help provide you with strategies that are more tax-efficient than decades of deferral.

By strategically building your savings in, and withdrawing from, these different accounts, you could have more opportunities to help reduce your tax burden. This can help you achieve your retirement goals while also helping allow your retirement savings to last longer.

Where to start

If you’re looking for a good starting point, talk to your financial adviser or tax professional about the benefits of contributing to a Roth IRA. Or, if it’s an option that’s available through your employer, you may also wish to consider a Roth 401(k).

If you earn too much to contribute directly to a Roth, or you’ve already accumulated savings in a 401(k) or traditional IRA, you can ask your adviser about the benefits of converting some or all of that money into a Roth.

Yes, you’ll pay more in taxes upfront when you transfer the money to your Roth IRA or Roth 401(k). But you may rid yourself of the ticking tax time bomb that’s waiting for you in retirement.

If you’ve been carefully tending to and growing your nest egg for years, don’t let taxes eat up more of what you’ve earned than is necessary.

Take steps now to transition to a diversified tax plan that can help you enjoy the retirement lifestyle you’ve worked so hard for.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Insurance products are offered through the insurance business Financial Services of America (FSA). Financial Services of American (FSA) is also a Financial Services practice that offers securities products and services through AE Financial Services, LLC (AEFS), member FINRA/SIPC. Financial Services of America (FSA) is also an Investment Advisory practice that offers investment advisory products and services through FSA Advisors (FSAA), a Registered Investment Advisor. AEFS and FSAA do not offer insurance products. The insurance products offered by Financial Services of America (FSA) are not subject to regulatory requirements and standards of care applicable to registered representatives and are not subject to investment advisory requirements. AEFS, FSAA and FSA are not affiliated companies. 4692502-3/25

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Did you know you can save too much money in your tax-deferred accounts, such as IRAs and 401(k)s? It’s true. I have witnessed this scenario firsthand more times than I care to count — and I count for a living.

A newly retired couple walks into my office intrigued by my holistic approach to retirement. They have been working and saving for 30-plus years for a hopeful 20-plus-year retirement.

They have sacrificed. They have skipped vacations to save. They have even missed grandkids’ baseball games in order to work overtime.

The plan was to grind it out and provide for their family. They were intentional about saving to ensure they could spend more time with family and enjoy the freedom to travel throughout retirement.

Yet, they find themselves distraught and losing sleep as their looming tax burden becomes a reality in April. They are filled with regret, feeling they have traded memories for uncertainty.

And when I ask them, “What is your biggest expense?” they will tell me it’s their mortgage. Or their travel budget. Or their health care. And then I ask, “What about taxes?”

Sound familiar?

A costly piece of the planning puzzle

People come to me overwhelmed by the burdensome thought or circumstance of outflowing tax dollars invariably crushing the spirit of what was intended to be a “happily ever after retirement.”

Have you ever considered that how much you have saved could be a cause of sleepless nights? It absolutely is. I see it almost every day.

I’m here to tell you it is never too late to kick Uncle Sam to the curb, or at least make him the low man on the totem pole. Many retirees can often do this in their lifetime, and they can most certainly help their heirs do so in theirs.

You see, the root of the problem is planning, or the lack of planning. It is journeying from “hope” as a plan to the certainty of a tax-efficient plan — an often-ignored piece of the robust retirement planning puzzle.

All of us have been sold a “bill of goods,” and it goes something like this: “Put as much money away into your 401(k)/IRA as you can, because when you retire you will be in a lower tax bracket.” If you haven’t saved any money for retirement, that is true.

If you have saved, especially in tax-deferred accounts, it is a lie. Every penny you take out of your tax-deferred accounts is taxable. And, of course, there is also the risk of taxes going up and changing tax brackets.

Do not mishear me. I am not against saving money. If I were, then my list of people seeking financial advice could be written on the back of a matchbook. You simply need a plan so that your savings are taxed at the lowest possible rate. My preferred rate is zero. And, yes, you can do that, too.

So, start effective tax planning today. It’s not too late, I promise.

Shifting from a micro to a macro mindset

There is one significant problem when delving into the issue of “lifetime taxation.” Nobody talks about it. When meeting with accountants, the focus is almost always looking to last year, talking about this year and maybe planning for the next.

It is what we call a “micro” look at tax planning. It is all about what can be done in the near term.

The focus needs to be widened. Taking a “macro” look at taxes over a lifetime will help in planning for the future. Why is it so important to plan for in the future? How about taxation on Social Security?

Up to 85% of your Social Security benefit can be taxed if your income is above a certain threshold. Believe me, those thresholds affect nearly everyone.

The snowball effect of RMDs

What about required minimum distributions? Yes, the infamous RMD. Currently, RMDs begin at age 73, rising to age 75 in 2033.

The percentage you have to withdraw starts at about 3.8% and continues to increase every year — until you die, or your money runs out. For people who have saved, RMDs are probably the biggest concern when it comes to lifetime taxation.

These distributions are required from any deferred account, including traditional IRAs, 401(k)s and 403(b)s. A deferred account is an account in which the funds have been added without paying any tax on them. The tax has been “deferred” until distribution. So, when distributions happen, they become taxable as ordinary income.

Yikes. You can begin to imagine the snowball effect this can have if you have significant savings. It can place you in a higher tax bracket and keep you there and/or climbing for the rest of your life. That stings.

Luckily, for now, the marginal income tax brackets are near an all-time low. However, that could very well change with the sunset of the current income tax laws set to occur at the end of 2025.

Given our national debt, spending and other economic factors, I am persuaded to believe in a high likelihood that taxes will increase in the near future.

Even more, there is a strong possibility that our heirs will be significantly affected.

Speaking of heirs, what about legacy planning for tax purposes? Though it may not be our focus here, it can cause a significant and costly burden.

Roth IRAs to the rescue

A good tax-efficiency plan takes all of this and much more into consideration. There are several tools that can be used to reduce lifetime taxation. The one we will focus on is the Roth IRA.

Others could be varying forms of life insurance and trusts created for a similar goal. The Roth IRA is an account where funds are added after tax has been paid. The funds in the account can grow tax-free. The gains made in the account are tax-free. The distributions in retirement are tax-free.

It is easy to see why these accounts can be a significant advantage to retirees. Yet, there are a couple of hindrances when trying to save for retirement in a Roth IRA.

They have low contribution limits and income phaseouts. You are only allowed to contribute $7,000 ($8,000, if you are 50 or older) per year in 2025. Unless you start very early in life, $7,000 per year is not going to solve most needs in retirement.

Also, if your income is too high, then the amount you can contribute is reduced or even eliminated if you make over a certain threshold. However, some tax-free money is better than no tax-free money.

That does not sound like a good tool, does it? But wait, there is more. You can convert a traditional IRA to a Roth IRA by simply paying the taxes at the time of conversion.

This is the Roth conversion you have probably heard so much about. Conversions can be done at any time, as many times as you want, and any amount that you want.

In my experience, the earlier the better. However, these strategies can take advantage of maximizing certain tax bracket thresholds over a few years. There is a real art to crafting the perfect strategy.

You don't have to be a tax expert

As you are probably beginning to realize, there are a lot of factors in play when doing tax planning. Many we have not even spoken about. Honestly, there are too many to list. But, deciding to plan is the key.

Using a fiduciary financial adviser with a comprehensive approach to planning to help you make decisions in your best interest will unlock a wealth of informed decisions about retirement and tax planning.

You will know the cost of each decision you make, both now and in the future. Knowing how these decisions will affect you now and over your lifetime is critical. This is the case, especially with Roth conversions.

Your goal from the beginning has been clear. You have worked so long and hard to save for a joyful retirement. Sacrifice has happened. Reap the rewards of your labor. It is not too late to enjoy the retired life. Now, let’s get to planning.

Related Content

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• A Roth Conversion Alternative That Addresses Long-Term Care

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

An IRA conversion to a Roth IRA is a popular pre-retirement or early-retirement move. Roth IRAs offer several benefits that traditional retirement plans don’t. Not only are investment gains in a Roth IRA tax-free, but withdrawals are tax-free, as well.

Just as important, Roth IRAs don’t require savers to take required minimum distributions (RMDs), as traditional IRAs and 401(k)s do. This allows Roth IRA holders to benefit from tax-free growth indefinitely and to use their retirement accounts to pass on wealth to younger generations.

However, because higher earners are barred from making direct contributions to a Roth IRA, some people find themselves needing to convert a traditional IRA or 401(k) to a Roth IRA after the fact. The process is fairly simple, but it’s essential to get the timing of those conversions just right.

IRA conversion to Roth from traditional accounts

If you have a traditional IRA, converting it is a straightforward process: contact the financial institution holding the account and complete the necessary paperwork. With a 401(k), things could get a touch more complicated, but not unreasonably so.

Many 401(k) plans allow direct rollovers to a Roth IRA. If not, you may need to open a traditional IRA, receive a check for your 401(k) balance and roll the funds into an IRA within 60 days. Once your traditional IRA is funded, you can initiate a Roth conversion.

Another option, if you have a 401(k), might involve an "in-plan conversion," which means converting your traditional employer retirement plan to a Roth, then moving those funds into an IRA.

You should know that a Roth IRA conversion is a taxable event. The amount you move triggers a tax bill for the year you make the conversion. That means you must plan ahead for these taxes.

You should also know that there's a five-year waiting period before you can withdraw converted Roth IRA funds to avoid a 10% penalty. However, that rule doesn't apply to the principal sum converted — only gains. It also doesn't apply once you turn 59½. At that point, you’re entitled to penalty-free withdrawals from any tax-advantaged retirement account you have.

Who benefits from a Roth IRA conversion?

People who expect to be in a higher tax bracket in retirement than during their working years can commonly benefit from a Roth IRA conversion. But there’s more to the story.

Bryan Bell, CFP®, ChFC®, is a vice president, senior investment adviser, and regional director at First Horizon who says Roth conversions can be especially useful for people in cyclical industries.

“Mortgage brokers and real estate agents, for instance, tend to go through feast-or-famine years,” he explains. “As such, we advise them to make maximum contributions to their retirement plans during feast years and then do a Roth conversion in famine years.”

Like Bell, Brian Schmehil, managing director of wealth management at The Mather Group, LLC, says Roth conversions are optimal for people who suddenly find themselves in a lower tax bracket.

“A Roth conversion may be wise if you’re transitioning from filing jointly to single due to a divorce or widowhood,” he says.

Doug Carey, CFA and president of WealthTrace, agrees and says the key is to focus on what your taxes look like now vs later.

“I have found that people who retire in their early to mid-50s, do not have a pension, and have very little taxable income from investments are prime candidates for a Roth conversion,” he says.

Timing a Roth IRA conversion

Because Roth IRA conversions are taxable events, it’s crucial to get the timing right. Natasha Howe, wealth manager and vice president at Siebert Financial, says the best time to do a Roth conversion is towards the end of any year in which you've received the least amount of taxable income.

“The reason why you should wait to do it towards the end of the year is because at that point you will have a better sense of your total projected income, which ultimately determines which tax bracket you fall into for that specific year,” she explains.

Carey also says that generally speaking, the sooner you can start converting, the better, provided you have a lower income tax rate than you expect to have in the future.

“By starting earlier, you allow the benefits of the Roth IRA tax treatment to compound over time,” he explains. To this point, Carey notes that the longer your life expectancy, the more valuable a Roth conversion becomes.

As he explains, there’s a break-even period before the conversion becomes beneficial because of the immediate tax bill it triggers. “You need time for the tax benefits to offset the upfront costs,” he says.

Carey also thinks it’s wise to spread Roth conversions over time to avoid jumping into a higher federal income tax bracket.

Bell, meanwhile, suggests paying attention to the stock market when a Roth conversion is on the table.

“Consider making a conversion when the market is down,” he says. “The strategy is to convert and pay taxes when the balance is relatively low and then let it grow back tax-free.”

Schmehil also warns that you must consider how your Roth conversion could impact your Medicare costs. Higher earners are subject to income-related monthly adjustment amounts, or IRMAAs, which drive up Part B and D premiums based on your modified adjusted gross income from two years earlier.

"If you're under 63 and planning to enroll in Medicare at 65, Roth conversions might be beneficial since you won’t yet face IRMAA surcharges," he explains. Otherwise, be cautious: a Roth conversion could increase your Medicare costs, at least initially.

The OBBB complicates things a bit

The passage of the One Big Beautiful Bill (OBBB) has introduced changes that could complicate Roth conversions, warns Schmehil.

"Instead of merely converting up to a certain income tax bracket or being mindful of IRMAA income levels, you now need to be aware of losing the additional $6,000 deduction for seniors over 65, with phaseouts beginning at $75,000 for singles and $150,000 for married couples," he explains.

Schmehil also warns those considering a Roth conversion to keep the new SALT cap rules in mind.

"There is an increased SALT cap of $40,000 for both single and joint filers, but it begins to phase out at $500,000 MAGI," he explains. "Staying below these income thresholds may make sense in certain circumstances, even if it means converting less in a given tax bracket."

If the OBBB makes a Roth conversion less appealing, Schmehil says there are ways to soften the potential tax blow from RMDs in a traditional IRA.

"As long as you plan to make qualified charitable distributions to offset most, if not all, of your RMDs, there’s no need to do Roth conversions just to pay taxes to the government, which could have been avoided altogether if the money was directed to charity," he insists.

All told, says Schmehil, there needs to be a compelling upside for a Roth conversion to pay off.

"Conversions only make sense if you’re achieving some form of tax arbitrage, meaning paying less now to avoid higher taxes in the future," he concludes. "Estate taxes and Medicare premium increases are also part of this consideration."

Read More

• Four Roth IRA Pitfalls Your Adviser May Not Tell You About
• Should You Convert a Traditional IRA to a Roth After 60?
• 6 Changes to IRAs, 401(k)s and HSAs in 2026
• The Average IRA Balance by Age
• Roth IRA vs. Traditional IRA: Which is Better?

When it comes to retirement savings, high earners face unique challenges and opportunities. Deciding between pre-tax traditional IRAs/401(k)s and post-tax Roth IRAs/401(k)s is not a one-size-fits-all decision. A well-thought-out strategy tailored to individual circumstances can make a significant difference in retirement outcomes. There are several key considerations for you to make, and your answers can help guide your decision-making process.

Classic deductible IRA and Roth IRA contributions can be out of reach for high earners with workplace retirement plans such as a 401(k)/403b/457s. Married couples filing taxes together are ineligible for 2025 deductible IRA contributions with modified adjusted gross incomes (MAGI) over $146,000. Roth IRA contributions ignore workplace retirement plan involvement, but those married filing jointly become ineligible with MAGI over $246,000.

Luckily, most workplace retirement plans allow employees to choose between traditional or Roth employee retirement plan contributions. According to T. Rowe Price, 93% of 401(k) plans offered Roth employee contribution options as of 2023, with 14% of participants using the feature. While participation seems low, this savings option only arrived in 2006. Traditional and Roth 401(k) contributions are not subject to any income limitations. So how do you choose?

1. Evaluate your current and future tax situation

One of the first questions to address is how your tax bracket today compares to your expected tax bracket in retirement.

Traditional accounts allow for tax-deferred growth, with contributions reducing taxable income today. However, required minimum distributions (RMDs) starting at age 73 if born between 1951 and 1959, and age 75 if born after 1960, could push you into a higher tax bracket in retirement. Those mandatory RMDs are taxed as ordinary income.

Roth accounts require paying taxes upfront but offer tax-free growth and withdrawals, making them attractive if you expect to be in a higher tax bracket later.

If you’re planning to retire in a lower-tax state, traditional contributions can make sense but having both traditional and Roth accounts allows flexibility depending on a year-by-year tax situation.

2. Consider your non-retirement investments

High-income households often have significant non-retirement investments that generate capital gains and income. This additional taxable income can influence the decision between Roth and traditional accounts.

Roth assets can provide a tax-free withdrawal option, complementing taxable accounts and giving you flexibility between tax-free and taxable withdrawal options in retirement.

Traditional accounts may defer taxes but could amplify the tax burden when combined with other income sources later in life.

3. Plan for RMDs and charitable giving

Traditional retirement account contributions come with ordinary income generating RMDs. Qualified charitable distributions (QCDs), or sending all or part of that RMD to charity, offers a tax-efficient way to meet RMD requirements for those charitably inclined. In contrast, Roth accounts have no RMDs during the account holder’s lifetime.

4. Think about your legacy and the next generation

The SECURE Act changed rules for most non-spouse inheritors of pre-tax/traditional retirement accounts, requiring those beneficiaries to distribute assets within a 10-year window potentially generating high ordinary income in that decade. Those inheriting Roth assets maintain the tax-free status.

5. Consider a well-timed Roth conversion

For high earners nearing retirement, Roth conversions can be a powerful tool — especially during early retirement years before claiming Social Security. These conversions allow you to “fill up” lower tax brackets gradually, avoiding a tax spike in later years. Many 401(k)/403b/457 plans allow in-plan Roth conversions also.

If pre-tax/traditional accounts make up the majority of your retirement assets, Roth conversions can help reduce future RMD and ordinary income tax obligations. When making conversions, working with a CPA will help you optimize your conversion amounts and ensure accuracy, as recharacterizations are no longer allowed as a result of the 2017 Tax Cuts and Jobs Act.

6. Split contributions between Roth and traditional accounts

Many employer-sponsored retirement plans allow for splitting employee contributions between traditional and Roth accounts, offering flexibility. This hybrid approach provides a hedge against future tax uncertainty. Determining the right split involves assessing current income needs, legacy goals and anticipated changes to tax laws or personal circumstances.

More advanced strategies, such as backdoor Roth IRA contributions and mega-backdoor Roth IRA contributions, also exist but are outside the scope of this article.

7. Take advantage of emerging Roth opportunities

High-income households can also take advantage of the higher contribution limits for Roth 401(k)s — up to $31,000 in 2025 for participants aged 50 or older. For more on the implications of the SECURE 2.0 Act, read the post I wrote after the law was enacted, The SECURE Act New Era – Retirement & Financial Planning Reminders.

Beginning in 2026, high-income retirement plan savers over 50 years old must execute their employee deferral catch-up contribution as a Roth. Employer match contributions may increasingly see Roth designation. As federal deficits continue to increase, adoration of Roth contributions by policymakers does too. Receiving tax revenue quickly helps the budget-scoring process of proposed legislation.

Final thoughts: Plan early and remain flexible

Estimating your future bracket can be difficult. Life happens and circumstances can always change. However, for married filing jointly couples currently and expected to remain in the top federal income tax bracket of 37% at over $751,600 of income in 2025, pre-tax/traditional contributions while working likely make sense. For early career savers and those with incomes projected to rise, Roth retirement account contributions can make a lot of sense.

When deciding between Roth and traditional accounts, the right answer depends on your unique situation. Factors such as tax strategy, retirement goals, legacy planning and expected changes in income or family dynamics all play a role.

Starting the conversation early allows for thoughtful planning and flexibility to adapt as circumstances evolve. With the right approach, high earners can maximize their after-tax retirement savings and create a more secure financial future.

This article is provided for informational purposes only, represents only a summary of topics discussed, and does not represent any investment, legal, or tax advice or recommendations. Readers must evaluate their own financial circumstances and needs and are strongly recommended to consult their professional advisors prior to making any decisions about their retirement planning. Certain of the content contained herein also represents the opinions of the author, which are subject to change without notice. Any changes in current laws or regulations could lead to vastly different conclusions from those described herein.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Inheriting an IRA or retirement plan can present both financial opportunities and challenges, especially with the recent changes introduced by the SECURE 2.0 Act. This legislation, which was signed into law in 2022, significantly reshapes how inherited retirement accounts are managed, with new distribution rules, tax implications and planning strategies to consider. Understanding these changes is crucial for beneficiaries looking to manage an inheritance effectively and make informed decisions about their financial future.

The SECURE 2.0 Act and inherited IRAs: What’s new?

The SECURE 2.0 Act brought substantial changes to the rules governing inherited retirement accounts, especially for non-spouse beneficiaries. The primary shift revolves around the elimination of the "stretch IRA" strategy. Previously, non-spouse beneficiaries could stretch required minimum distributions (RMDs) over their own lifetimes, allowing them to spread out withdrawals and tax obligations over many years.

Under the new regulations, most non-spouse beneficiaries must now withdraw the full balance of an inherited IRA within 10 years of the original account holder’s death. Known as the "10-year rule," this change compresses the distribution period, which can have notable tax consequences, particularly if the beneficiary is already in a high-income bracket.

There are exceptions to this rule, particularly for eligible designated beneficiaries (EDBs), who include surviving spouses, minor children of the original account holder (until they reach the age of majority), disabled or chronically ill individuals and beneficiaries who are not more than 10 years younger than the original account holder. These EDBs are still allowed to stretch RMDs over their lifetimes. Individuals who do not qualify as an EDB must adhere to the 10-year rule and are considered non-eligible designated beneficiaries (NEDBs).

Navigating tax implications of inherited IRAs

For beneficiaries, understanding the tax implications of inherited IRAs is essential. Traditional IRAs and Roth IRAs, in particular, come with different tax obligations and planning opportunities.

Traditional IRAs. Distributions from inherited traditional IRAs are treated as taxable income. For NEDBs who must fully deplete the account within 10 years, withdrawing large amounts over a short period can lead to substantial tax liabilities. This accelerated distribution requirement may push beneficiaries into higher tax brackets, resulting in a larger tax burden. Careful planning around the timing and amount of withdrawals is therefore critical to minimize tax impact.

Roth IRAs. For beneficiaries inheriting a Roth IRA, the tax situation is different. While the 10-year rule still applies for NEDBs, withdrawals from a Roth IRA are generally tax-free, provided the account has met the five-year holding requirement. This feature allows beneficiaries greater flexibility in managing distributions without triggering income tax, which can be particularly advantageous if they wish to delay distributions until the end of the 10-year period (to allow for continued tax-free growth). However, it’s important to remember that while the distributions are tax-free, the account must still be fully depleted within the designated 10-year period.

For both traditional and Roth IRAs, NEDBs have flexibility in choosing when to take distributions within the 10-year window. Some may prefer to spread withdrawals out evenly over the decade, while others might choose to delay or accelerate distributions if they anticipate lower taxable income or a need for the funds.

EDBs vs NEDBs: Key considerations

The options available to EDBs inheriting IRAs differ significantly from those available to NEDBs, offering some additional flexibility.

Spouses/EDBs have three primary options when inheriting an IRA:

• Treat the IRA as their own (spouses only). This option allows a surviving spouse to treat the inherited IRA as if it were their own, effectively merging it with their own IRA. This strategy provides the greatest flexibility, particularly if the spouse is under 59½ and intends to delay RMDs until they reach the applicable age.
• Open an inherited IRA and utilize the stretch provision. By keeping the account as an inherited IRA, an EDB can avoid early withdrawal penalties if they are under 59½. This approach allows the EDB to stretch distributions based on their own life expectancy.
• Withdraw the funds in a lump sum. While this option is less common due to its immediate tax consequences, an EDB can choose to withdraw the full balance in one year. This may be appropriate if the account balance is relatively low or if other circumstances justify a complete withdrawal.

NEDBs, by contrast, do not have the option to treat the account as their own, nor can they utilize the stretch provision. Instead, they must adhere to the 10-year rule. Given the 10-year distribution requirement, NEDBs often need to consider tax implications more carefully, especially when managing inherited traditional IRAs. For those inheriting Roth IRAs, it can be advantageous to let the account grow tax-free for as long as possible within the 10-year timeframe.

Strategic planning for inherited IRAs and retirement accounts

The SECURE 2.0 Act changes mean that strategic planning around inherited IRAs is more important than ever. Here are a few strategies that beneficiaries might consider when deciding how to handle inherited retirement accounts:

Consider your income tax bracket. With traditional IRAs, beneficiaries may want to evenly spread withdrawals over the 10-year period if they’re in a higher tax bracket or concentrate withdrawals in years when their income is lower to minimize tax impact.

Maximize tax-free growth in Roth IRAs. If inheriting a Roth IRA, beneficiaries could delay distributions until the end of the 10-year period to maximize tax-free growth, especially if they don’t need immediate access to the funds.

Coordinate with existing retirement accounts. For beneficiaries who already have retirement accounts, integrating an inherited IRA into their overall retirement plan may allow them to balance withdrawals across accounts, optimizing tax efficiency and potentially reducing the tax burden over time.

Evaluate state tax implications. Some states have different tax treatments for inherited IRAs. Beneficiaries should be aware of state-specific rules, as they may affect the timing or tax rate of distributions.

Understand RMD rules for both EDBs and NEDBs. Beneficiaries who must take RMDs need to ensure they are following IRS guidelines and tracking changes that might affect their status.

Inheriting an IRA or retirement plan under the SECURE 2.0 Act comes with new rules and considerations, but with careful planning, beneficiaries can make choices that honor their loved one’s legacy while considering their own financial future. By understanding the distribution requirements, tax implications and available strategies, beneficiaries can better navigate these complexities and make informed decisions that align with their financial goals.

Elizabeth Pappas, CPA, is a Wealth Advisor at Linscomb Wealth in Houston. Elizabeth’s mission is to empower clients to achieve their financial goals and build lasting wealth. With a personalized approach, she works closely with individuals and families to understand their unique circumstances, values and aspirations. Whether it’s planning for retirement, managing investments or preparing for life’s unexpected events, Elizabeth provides clear, tailored advice that aligns with her clients’ goals.

Luke Wuthrich is a Senior Wealth Associate at Linscomb Wealth, where he has been since July 2022. Currently a candidate for CFP® certification and a CFA Level 1 candidate, he is committed to expanding his expertise in wealth management and portfolio management. With a Bachelor of Science in Business from the prestigious Kelley School of Business, with concentrations in Accounting and Finance, Luke is excited to apply his knowledge and skills to positively impact the lives of others.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you inherited an IRA, that windfall may cost you money if you aren’t careful. That’s because there are rules surrounding inherited IRAs to ensure the money is eventually taxed and the IRS is paid.

Run afoul of any of the rules and you may create a costly tax event or worse, face fees and penalties.

“There is no downside to inheriting an IRA other than not being able to handle it,” says Ed Slott, president of Ed Slott & Co., an IRA distribution firm in New York.

“I’ve worked with parents and grandparents who don’t talk to their kids about inheritance. The kids get a windfall but don’t realize it’s taxable.”

What is an inherited IRA?

An inherited IRA, sometimes referred to as a beneficiary IRA, is created when an IRA is passed on to a spouse, family member, or loved one when the account holder passes away.

Regardless of who receives the inherited IRA, two rules apply:

• Assets in the original IRA must be transferred into an inherited IRA in the beneficiary’s name.
• Additional contributions can't be made to the inherited IRA.

The funds remain tax-deferred as long as they are in the account.

Spousal vs. Non-Spousal Beneficiary Options At a Glance

Spousal vs. Non-Spousal Beneficiary Options At a Glance

Rules for spouses inheriting an IRA

You can leave an IRA to anyone, but tax rules favor the spouse.

“Spouses have the most flexibility when inheriting assets,” says Sham Ganglani, retirement distributions leader at Fidelity Investments. “They are the only ones that can treat the money as their own.”

If you receive an IRA from your deceased spouse, you have several options:

1. Take over the account. You become the account holder of the IRA via a spousal transfer. The money is accessible immediately, but any distributions are taxable.

If you are under age 59-1/2, there may be penalties unless you meet certain exceptions.

Required Minimum Distributions are based on your age, not the age of the deceased account holder, and therefore can be spread out over a greater number of years if you are younger. This can help lower the potential tax hit.

2. Open an inherited IRA. You can roll the assets into an inherited IRA. RMDs are required based on your life expectancy, and you have to empty the account by the tenth year.

This may be beneficial for spouses under the age of 59-1/2 who need access to the money.

3. Take a lump sum. You can take a lump sum distribution, but the money will be treated as ordinary income. Keep in mind the withdrawal could push you into a higher income bracket, which means more taxes.

Rules for non-spouses inheriting an IRA

For non-spousal beneficiaries who don’t meet the exemptions, the rules are less flexible and options are limited to the following:

1. Open an inherited IRA. Required Minimum Distributions (RMD) for non-spousal beneficiaries are based on life expectancy, and the ten-year rule applies. Assets continue to grow tax-deferred.

2. Cash out. You can take a lump sum and close the account, but there are tax consequences. If it's a traditional IRA, the money will be treated as ordinary income. Plus, it may push you into a higher income bracket, increasing your tax burden.

Watch out for the ten-year rule thanks to the SECURE Act

Non-spouse beneficiaries and spouses opening an inherited IRA need to be mindful of the ten-year rule, which requires beneficiaries to liquidate the account by the 10th year of the account holder’s death.

That’s where people get in trouble if they haven't spread out withdrawals over the years.

“That’s a big tax hit in year ten,” if you do nothing, says Slott.

Thanks to the SECURE 2.0 Act, IRA accounts inherited by non-spouses after December 31, 2019, are subject to the ten-year rule.

There are some exemptions. If the beneficiary’s age is within ten years of the deceased, is disabled or chronically ill, or is a minor child of the deceased, then the old rules apply. You can withdraw the money for as long as you want.

If the deceased had already begun making required minimum distributions (RMDs), which kick in at age 73, the new IRA beneficiary must continue to do so during the ten years. Drawdowns are recalculated based on your life expectancy.

Inheriting a Roth IRA

If you inherit a Roth IRA, the same rules apply, but there is one benefit: you don’t have to pay taxes on any withdrawals because it's funded with after-tax dollars. Plus, the account grows tax-free.

There are caveats for tax-free distributions: The original Roth IRA has to have been funded for five or more years, and any assets withdrawn from converted balances have to have been in the account for five years at a minimum.

While the original owner does not have to worry about RMDs, you do. But it’s not in the traditional sense.

You just have to make sure the account is emptied within ten years of the original owner’s death if you are a non-spouse.

If you are inheriting the Roth IRA from a spouse, you can treat the Roth IRA as your own and take distributions over your lifetime.

Spread it out to save on taxes

When it comes to handling inherited IRA requirements, financial advisers say spreading withdrawals out over several years is the best way to lower the tax implications.

The beauty of an inherited IRA is that you can withdraw more if you need it one year and less another year without facing a penalty.

“Try to avoid picking a lump sum,” says Ganglani. “That’s a tax consideration many people don’t think about.”

Once you have the inherited IRA, don't let loyalty keep you from making changes to the holdings within the account.

“If those investments you inherited don’t align with your risk and your objectives for saving and growing assets, don’t be afraid to reallocate them,” Ganglani says. “Don’t think this is dad’s IRA.”

Disclaiming the inheritance, the better option?

For some people, disclaiming an inherited IRA is the better option. That’s particularly true if they are trying to avoid a tax hit, disqualifying from a benefit, or want the asset to go to someone else.

Whatever the reason, there is only a short window — typically nine months from the account owner's death — to disclaim the inheritance.

Disclaiming an inherited IRA is complex and requires you to seek professional advice. Keep in mind that once you do it, it's irrevocable. It can’t be changed. The inherited IRA automatically passes to the next-in-line beneficiary.

Follow all the rules when inheriting an IRA

Inheriting an IRA can be a boon to your retirement savings, but you have to be mindful of the rules.

Whether you are a spouse or non-spouse beneficiary, make sure to open the proper account, make tax-smart withdrawals, and seek help when you need it.

You don’t want what was intended to be a financial windfall to turn out to be a costly mistake.

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Almost everyone has an IRA, 401(k) or similar retirement savings account. The purpose is to have that money available when you stop working. But what if you don’t need it right away?

This question was prompted by readers who want to know how to create options with the income from their IRA to minimize taxes and maximize liquidity — rather than merely taking the required minimum distributions (RMDs) each year. Their primary goals are about longer-term liquidity and legacy, instead of just income.

In my last article, How Combining Your Home Equity and IRA Can Supercharge Your Retirement, I wrote about how most retired families own an IRA and a home, but very few are considering how they could work together in a plan for retirement income. The retiree we frequently cite as an example — 70-year-old Sally — used the combination of her home and her IRA to generate immediate income equal to 6.5% of her $1 million in IRA savings.

This article focuses on a version of this IRA/home combination that defers distributions and lowers taxes and at the same time increases the long-term growth in the account value, liquidity and legacy.

How an IRA/home plan meets liquidity and tax objectives

Sally’s twin sister, Susan, is concerned about costs for long-term care and other health-related events and wants to maximize liquidity so she can pay for these costs in coming years — and not be a burden for her kids. She does not own long-term care insurance.

She has several children and grandchildren and wants to leave a large legacy. In addition, she’s concerned that she may have to help with funding the grandkids’ college education. To do all of this, she needs to lower her IRA distributions and her taxes.

Susan and Sally share the same adviser, who recommends an allocation of their identical resources — $1 million in their IRAs and $1 million in the value of each of their homes — in the same set of planning components below.

Home equity can serve several functions during your retirement. Learn more about that program, called H2I, in my article How to Add Home Equity to Your Retirement Income Planning.

Susan’s objectives are different than Sally’s

• Starting income. Sally wants and needs $65,000 per year to start and to have income grow at 2% per year. Sally has LTC insurance and is paying those premiums. Susan has a higher pension and Social Security benefit. Plus, she wants to minimize taxable income and is OK with a lower starting income.
• Liquidity at age 85. Sally is OK with having $1 million in liquidity at 85; Susan wants more like $1.5 million because of her concern about the costs of health-related events and long-term care.
• Legacy at age 95. Both sisters have longevity in their genes, and Sally is OK with a $2.5 million goal at age 95; Susan wants more like $3 million for her family, which is larger.

So, with the same resources and planning components but with different retirement objectives, how do they meet retirement goals and satisfy RMD rules in both cases?

How to meet objectives and satisfy RMD rules

Well, Sally’s primary goal is high starting income, and the plan pays that out. Thus, her income will be larger than her RMDs, and no special RMD planning is required.

In Susan’s case, her goal is to minimize income and taxes, but she still has to comply with RMD rules. Her plan takes the following steps:

• Allocation to a qualifying longevity annuity contract (QLAC), which defers distributions. Susan is going to increase her QLAC from Sally’s $150,000 to the maximum of $200,000.
• Lower allocation to a single-premium immediate annuity (SPIA) since Susan doesn’t need or want the higher starting income.
• Susan plans for her IRA payouts to start at age 73, permitted under RMD rules.
• Finally, Susan’s adviser is aware of a rule adopted in the SECURE Act of 2019 that includes the market value of her SPIA in her IRA account value. Seems counterintuitive, but the new rule reduces the required withdrawals from her investment portfolios.

Defer income and minimize taxes

Susan starts with $1 million in her IRA, and she spends the maximum $200,000 to purchase a QLAC. The value of her account after the QLAC is $800,000 at the start, including her investment account value and the SPIA ($162,500). To use the combined value going forward, she will need to get the market value of the SPIA from the annuity company or an actuary.

She will not need this value until age 73, when she takes her first RMD. At that age under the plan assumptions, the total value is now $1,002,000, and the RMD is $40,600. She satisfies the RMD payment with the $13,100 SPIA payment and a smaller (than previously planned) withdrawal of $27,500 from her investment account. In addition, she is getting tax-free drawdowns from her H2I program of $20,500, and thus less than 65% of her income is taxable at age 73.

Her sister Sally’s plan is different. Sally is receiving a smaller H2I payment, starting distributions at age 70 and keeping the SPIA separate from her account value. For her, the first-year income is $65,000, over $50,000 is taxable, and more than $31,000 is coming out of her investment account.

Increase liquidity and legacy

With lower withdrawals from her investment account, Susan is on track to meet her liquidity goal of $1.5 million at age 85 (see graphic below). And her legacy nearly reached her $3 million goal. Bottom line: Susan was able to achieve her long-term objectives, and Sally was able to meet her starting income goal.

Different plans, but both sisters are happy because they achieved their respective objectives.

You can build a plan to meet your own objectives by visiting here to get started with no obligation. Consult with your own qualified adviser, find an analytical tool to provide some guidance or talk to a Go2Specialist.

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• How Your Home Can Fill Gaps in Your Retirement Plan

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you are trying to decide between an IRA vs. 401(k), count yourself lucky. Not everyone's employer offers 401(k)s, and many working people feel too cash-strapped to contribute to a retirement account. And that's a shame — because these popular accounts act as powerful, tax-advantaged ways to save toward retirement. Given common concerns about the Social Security trust fund, which is projected to run out of money as early as 2033, IRAs and 401(k)s are even more crucial for a secure retirement.

While they share many characteristics, there are also key distinctions to be aware of when comparing an IRA vs. 401(k). For example, many 401(k) plans offer an employer match up to a certain amount, while IRAs lack this feature. If you understand these similarities and differences, you can compare them to determine the best way to save based on your circumstances and goals.

IRA vs. 401(k) — or both?

Here's the good news: you don’t have to choose between an IRA or a 401(k). It’s perfectly fine to use both. After comparing the features of each plan, you may elect to save a portion of your paycheck in a 401(k) but contribute additional money to an IRA. Or you may decide to contribute the maximum amount to each.

Do you have access to a plan?

The first difference lies in who may be eligible for each type of plan.

401(k)s are employer-provided. To open a 401(k), you need to work for an employer that sponsors one and qualify for participation based on their criteria. Generally, if you are at least 21 and have worked with that employer for at least a year, then you qualify.

IRA stands for an individual retirement account. That “individual” part means you can open one independently, unrelated to your employer. However, you can only contribute to an IRA with earned income, such as wages, salaries, tips, bonuses, commissions, and self-employment income.

If you are married, consider opening a spousal IRA if you or your spouse qualifies.

If you are self-employed, you still have choices. For example, you might opt for a SEP IRA or a solo 401(k).

Contribution limits

Every year, the IRS sets contribution limits for IRA and 401(k) accounts, usually with some changes to account for inflation.

IRAs. You can contribute a maximum of $7,000 in 2025. Catch-up contributions for taxpayers 50 and older are limited to $1,000, for a total contribution of $8,000. These numbers are unchanged from 2024.

401(k)s. Eligible savers can contribute $23,500 to these accounts in 2025, up from $23,000 in 2024. Savers between 50 and 59, or over 63, may make catch-up contributions of $7,500 2025 for a total contribution limit of $31,500 in 2025.

There's exciting news for those aged 60-63 in 2025. The "super catch-up" provision allows them to contribute an additional $11,250 instead of $7,500 allowing then to contribute $34,750 in total for 2025.

Matching contributions

Employers can also contribute to your 401(k) account through matching contributions, and many do. This additional money provides a powerful boost to your savings; with careful planning, you might even become a 401(k) millionaire. So, when available, it is usually best to prioritize saving in your 401(k) until you receive every matching dollar you can. Each employer has their own matching formula, but all follow the same general format in which they match a portion of your contributions up to a maximum percentage of your salary.

For example, your employer may provide a 50% match up to 10% of your salary. Assume you make $100,000. For every dollar you contribute up to $10,000, your employer will contribute an additional 50 cents. So you could receive an extra $5,000 per year just for saving. After 25 years, that would amount to an additional $365,000, assuming your account earns 8% annually.

There's no match option with an IRA. However, two fintech firms are offering to match IRA contributions. Robinhood promises to match 1% of IRA contributions for regular customers and up to 3% for those who pay an additional annual fee as "Gold" members. SoFi offers a 1% match for IRA rollovers and contributions. However, before you open an IRA with these companies, ensure they have the investments you'd like to put in your IRA and check for fees and limitations. You may be better able to build IRA wealth through smart investment choices than a match.

Tax deductions

One of the main advantages of retirement accounts is the tax benefits they provide. This includes the ability to deduct your contributions and defer paying income tax until withdrawal.

However, if your employer offers a retirement plan, you may not be able to deduct your IRA contributions depending on your income (as determined by your modified adjusted gross income (MAGI) and filing status.

You can always get the tax benefit of your traditional 401(k) contributions regardless of your income. Income tax rates are progressive, so higher earners benefit more from deductions. Consider your income and deductibility of contributions if you are covered by a 401k.

Roth IRA vs Roth 401(k): Income Limits

Another income limit that can hinder your IRA savings is the Roth IRA income limit. Roth IRAs have the potential to be very valuable, but you can only contribute to a Roth IRA if your income falls below certain thresholds.

However, many 401(k) plans also provide Roth options. Your income does not affect your Roth 401(k) contributions. As long as you work for an employer that offers one, you can contribute to a Roth 401(k) regardless of how much money you make.

Early withdrawals

If you withdraw from a tax-deferred retirement account (traditional IRAs or 401Ks) before you reach 59-½, you usually are subject to a 10% penalty on top of regular income tax. However, with a traditional 401(k), you may be able to take advantage of the rule of 55. If written into your plan’s documents, it provides an exception to the early withdrawal penalty if you retire at 55 or later. This rule does not apply to IRA withdrawals.

You may withdraw penalty-free from Roth IRA and 401(k) accounts if you withdraw from the amount you contributed, not on investment gains. This extra layer of flexibility means you can fall back on a Roth account in an emergency.

The rules for early withdrawal from IRAs and 401(k)s are complex. If you are tempted to go this route, run your plan by a financial planner or tax adviser to ensure you won't be penalized.

Investment options

Your investment choices inside a 401(k) will be limited, typically to a specific list of mutual funds. Depending on the choices available, you may not be able to create the portfolio you’d like within a 401(k). With an IRA you’ll often have access to a much wider range of investments to include stocks, bonds, mutual funds, and ETFs. You can also add Treasury bonds, bills and notes to an IRA.

Read More About Retirement Savings

• Roth 401(k) vs. 401(k): Which Is Right for You?
• Is a 401(k) Worth It? Here are the Pros and Cons
• How to Convert a Traditional IRA to a Roth after 60
• Average IRA Balance by Age
• Average 401(k) Balance by Age

More people than ever are choosing to retire early, kick their feet up and enjoy their golden years. One in eight workers hopes to retire before they turn 61. However, that requires building a comfortable financial situation to survive 20, 30 or even 40 years of retirement.

That’s why choosing the right type of retirement strategy is vital to setting yourself up for financial success in your golden years. One of the biggest complaints I hear from retirees is that their taxes are too high. Tax expenses don’t end when you retire, but proper planning can help minimize your tax burden when you’re ready to use your money. Whether it’s an employer-sponsored 401(k) plan or an IRA, the choice between a traditional and Roth retirement plan requires a thoughtful approach.

It’s important to take a holistic view of your retirement fund throughout your whole life for efficient financial planning. Your ultimate goal: Maximizing your retirement fund while paying only the taxes you should owe.

How can you minimize taxes in retirement?

There is one clear difference between Roth IRAs and Roth 401(k)s and traditional IRAs and 401(k)s: when you pay taxes on your contributions. Traditional retirement savings plans are tax-deferred, meaning any contribution you make will be tax-free — until retirement. Once the retiree starts withdrawing money, they must pay taxes on every dollar of that money. In addition, traditional accounts have required minimum distributions (RMDs), forcing you to make a minimum annual withdrawal based on how much money is in the account. This increases your taxable income.

The starting age for RMDs keeps rising — it rose from the original age of 70½ to age 72 five years ago, then to the current age of 73 and finally will creep up to age 75 in 2033 — but just know that the day will come that you’ll have to pay the piper.

Compare that with a Roth account, where contributions are taxed when they are made. While you don’t get an immediate tax break, when the money is ready to be used in retirement, it will be available to you 100% tax-free. Plus, Roth accounts don’t have RMDs.

The benefit of pre-tax contributions in traditional accounts is they lower your taxable income in the year you make them. Common wisdom used to tell workers to take advantage of pre-tax contributions. However, by delaying the tax bill until retirement, many retirees are spending more tax dollars later in life after seeing their account values grow.

So, paying taxes on Roth contributions today can lead to a smaller lifetime tax bill than you would have if you deferred taxes until retirement by contributing to a traditional account.

The big picture

It’s easy to view a tax bill on an individual year-by-year basis. However, our goal should be to pay no more taxes than necessary over our lifetime. Unless Congress takes action, the Tax Cuts and Jobs Act will sunset at the end of 2025, which could lead to tax increases for many Americans. Regardless of whether it is extended, most financial professionals expect taxes to increase in the future.

People often consider only which tax brackets they might be in at retirement rather than considering what their overall tax bill will be. Good planning should be based on what we know today: We invest to grow our account balances. Regardless of the tax bracket, higher account balances in tax-deferred accounts will lead to more taxes in retirement.

Diversifying your retirement accounts today could be an important tool for determining how those assets are held and used in retirement. One example is Roth 401(k)s, which are increasingly offered as part of employee benefit packages. They provide benefits beyond just not having RMDs and not having to pay taxes on distributions. They also give you a pool of retirement money you can draw from in emergencies without adding to your taxable income.

However, although 80% of employer-sponsored retirement plans offer a Roth option, only 17% of Americans took advantage of them, opting instead for a traditional account. Many employers offer a pre-tax match on 401(k) contributions up to a specified percentage, and employees who contribute to a Roth also can receive the match (because it is pre-tax, it would go into a traditional 401(k) account).

For many, contributing more heavily to Roth accounts can lead to a lower lifetime tax bill than sticking only to traditional 401(k)s and IRAs. Rarely do retirees complain about having too much tax-free money. Depending on your unique situation and your employer match, it may make sense to contribute to a traditional retirement account, its Roth counterpart, or both.

There can be benefits to diversifying your assets with both types of retirement accounts. The decision requires a detailed look at your financial situation. When choosing how to approach Roth and traditional accounts in your retirement strategy, work with a financial adviser who is familiar with your individual financial picture and goals.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Choosing to name your children as beneficiaries over your IRA is a nice gesture. But without proper planning, it can become a huge tax burden that could result in the IRS getting more of their inheritance money than you intended. So, what can you do — as a parent — to help minimize the tax bill?

First and foremost, it’s worth noting that you can’t get around paying taxes on a traditional IRA. Whether you’re the initial owner or a beneficiary, the IRS wants its cut. It seems simple enough, but what you may not realize is that the beneficiaries you name on your IRA will be taxed based on their tax bracket, not yours. Generally speaking, your children will likely be in a higher tax bracket than you — especially if you’re retired and they’re still working.

To give you more perspective, imagine you’re retired and currently fall into the lowest tax bracket possible. Note the lowest tax bracket in 2024 is 10%, which applies to single filers making up to $11,600 or joint filers making up to $23,200. Let’s say you decide to name your eldest child, Rob, as a beneficiary of your traditional IRA, which is worth $600,000. Rob, who is single, works as a lawyer, making $115,000 a year with a tax rate of 24%.

If you were to die suddenly, that $600,000 would be taxed at 24% because that’s the tax bracket Rob falls into. In other words, because your son falls into a higher income tax bracket, his inheritance from your IRA is taxed at more than double your rate. Furthermore, he’ll likely only have 10 years to draw down that account due to the IRS’ 10-year rule.

So, what steps can you take now to help ease the tax burden for your heirs?

Roll funds into a Roth IRA

You could convert your traditional IRA to a Roth. You will have to pay taxes on the amount that you convert at your ordinary income tax rate, but withdrawals will be completely tax-free from then on out— for you and your heirs. So, even though Rob is in the 24% tax bracket, he would pay 0% in taxes on his inherited Roth IRA.

Roth conversions can have wide-ranging effects on things like Medicare premiums and the taxes you pay on your Social Security, so it’s important to be strategic about when you make them and how much you convert at a time. There are several windows of opportunity for Roth conversions, including the years when you’re between retirement and the age at which you must start taking required minimum distributions. But with so many variables to account for, it’s a good idea to consult with a financial adviser to make a plan.

Avoid dividing accounts equally among children in different tax brackets

If Roth conversions don’t make sense in your situation, or if you convert only a portion of your traditional IRA, chances are you may still have a significant amount in your traditional IRA to pass down. So, what else can you do to help limit the taxes your heirs will pay?

Since children in higher tax brackets will ultimately pay more in taxes on the inherited amount from traditional IRAs, consider distributing more funds from your IRA to your children in the lower bracket to minimize the tax burden. While you think you’re being fair in dividing it equally, your children won’t end up with the same amount post taxes due to varying income tax brackets. So, give Johnny — a teacher in the 12% tax bracket — your IRA and give Rob — a lawyer in the 24% tax bracket — your money market account, which has less far tax consequences.

Prioritize drawing money from your IRA over other income streams

It may not seem like it, but making this income source a priority in your early retirement years can be a huge benefit to your heirs. Drawing from this account first is a tax-smart strategy that will not only reduce the taxable amount for your heirs, but it will also help you minimize your tax bill.

Meet with an adviser

If you’re planning to leave an IRA to your children, meet with a financial adviser to determine how to handle those funds. You could put them in a CD, an annuity or invest in securities. A professional can help you talk through these options in more detail. Regardless of which option you choose, the money should still be growing, just in a different vehicle.

Passing wealth on to your children or other loved ones is a great act of kindness. Don’t let a lack of planning turn your gift into more of a burden for your heirs. Do some research on the best ways to repurpose that money and set up an appointment with a professional. They can help you talk through your options, minimizing the bill you may pay.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In January 2020, the SECURE Act went into effect, significantly changing the rules for retirement accounts. In January 2022, we got SECURE 2.0. Then, later in 2022, we got “proposed regulations” from the IRS contradicting parts of the original SECURE Act. More than four years after the original legislation, in July 2024, we got the final regulations clarifying the new rules.

The combination of the SECURE Act, SECURE 2.0 and the final regulations released in July creates a nearly impossible maze to navigate when it comes to distributions from inherited accounts. Before we look at these insanely complicated rules, we must define a few things.

Key definitions

Eligible designated beneficiary (EDB). In most cases, this will be the spouse inheriting the retirement account, but it’s not just spouses. According to the IRS, an eligible designated beneficiary is:

• A spouse or minor child of the deceased account holder
• A disabled or chronically ill individual
• An individual who is not more than 10 years younger than the IRA owner or plan participant

Non-eligible designated beneficiary (NEDB). If you are not an eligible designated beneficiary, you are an NEDB. This is most commonly adult children. The rules are more complicated for you.

Required beginning date (RBD). This is the age at which the original account owner must begin taking their own required minimum distributions (RMDs). This used to be 70.5 for everyone. However, SECURE and SECURE 2.0 introduced age brackets based on year of birth:

Inheriting IRAs: Four common scenarios

Below, we outline the most common scenarios we see with our clients. Please note: These are all for traditional IRAs. Roth accounts have their own rules.

1. Spouse inheriting an IRA before RMDs start for the original owner (this is the RBD) (EDB)

• Inherited IRA stretch. If you choose this option, you will have to start taking distributions by the later of December 31 of the year following the year of death, or December 31 of the year the owner would have hit their RBD. This option allows for small distributions over the rest of your life.
• Inherited IRA 10-year rule. The only thing the IRS cares about in this scenario is that the account is completely emptied by December 31, 10 years after the year of death. For example: The owner dies on January 15, 2020. The spouse must take all the money out by December 31, 2030.
• Spousal transfer. You move the money into your own IRA and treat it as your own. All the same rules apply as they would if it had always been your account.

2. Spouse inheriting an IRA after RBD (EDB)

• Spousal transfer. Almost exactly the same as the scenario above, except that you do have to take the RMD due for the year of death, for the original owner. For example: If the decedent had not taken their $40,000 RMD for the year they died, it is your responsibility to take it (I’m sure you were looking for another item to add to your to-do list …). Once that RMD is taken, the IRA is treated the same as the rest of your IRA account(s). This is an option only if you are the sole beneficiary.
• Inherited IRA stretch. You must still make sure that you take the owner’s year-of-death RMD, but in the following year you will calculate your annual RMD based on the IRS single-life expectancy table.

3. Adult child (NEDB)

• Before RBD. Money will be rolled into an inherited IRA. There is no annual RMD requirement except in the year of death. However, the entire balance must be distributed by December 31, 10 years after the year of death.
• After RBD. Money will be rolled into an inherited IRA. There is an annual RMD requirement in years one to nine, post-death. This amount is based on the IRS single-life expectancy table.

4. Disabled adult child (EDB)

Disabled adult children essentially follow the rules prior to the SECURE Act. They can stretch distributions over their life expectancy, using the IRS single-life tables.

The bigger picture: Tax planning

Hey, don’t shoot the messenger! I left out some of the even more complex rules around trust and successor beneficiaries that our firm is also tracking for our clients. There is a bit of silver lining here: The SECURE Act went into effect on January 1, 2020. However, these final regulations didn’t come out until July 2024. So, if you read one of the above scenarios and thought, “Uh-oh, I haven’t been taking distributions,” that’s OK. They were waived for 2020-2024. However, that 10-year clock is still ticking.

I must now zoom out to bigger-picture planning, as I often do. Much of the work and the pain of RMDs has to do with the associated tax bill. We project out RMDs in our planning software to see the tax trend and then use standalone tax planning software to do the actual calculations. This means that when there are legislative changes, the software needs to be updated. Be sure your planner has updated theirs. Also, be sure the inputs in the plan are correct, including the original owner’s DOB and DOD. Otherwise, your numbers will be wrong.

If you want to use a free version of our planning software, you can access it here.

Related Content

• What to Know Before You Inherit an IRA
• Inherited an IRA? Five Things Every Beneficiary Should Know
• IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many
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• Four Ways to Give Money Tax-Free to Your Kids When You Die

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Age 59½: That’s the magic age when you can typically take penalty-free distributions from your retirement accounts. If you’re still working and have a 401(k), it’s also the age when you can possibly utilize an in-service withdrawal to increase your investment options and take advantage of additional planning opportunities.

Sure, 401(k)s are a great investment during your working years. You might get a company match, which is free money for you if you contribute a certain amount of your own funds. You’re also able to benefit from the power of compound interest through the massive market returns we’ve seen in the past. Plus, many 401(k)s are low-cost — making them an attractive way for individuals to save for retirement.

One drawback of 401(k)s is that most plans don’t allow for in-service withdrawals until you turn age 59½. When you do, you have two options: leaving your money in the 401(k) or moving it into an IRA. But which options should you take?

There are three reasons why moving a 401(k) to an IRA could make sense for you:

Reason #1: More investment options

Most 401(k)s have limited investment options, while IRAs typically offer thousands of options to choose from. This allows you to find investments that may be better suited for your goals and risk tolerance.

An IRA might also offer opportunities to return a potentially higher amount than the stable value option in your 401(k). Let’s say your 401(k)’s stable value option is guaranteed to increase at a fixed rate of 3% per year. An IRA offers other investment options that may be able to produce a much higher return of 5% to 6%.

This 2% difference may seem small — but it could lead to you having a lot more money for retirement over time. For example, if you have $1 million saved, a 2% increase on your return can result in $20,000 more in annual growth, which compounds over time.

Reason #2: Opportunity for Roth conversion

Moving your money from a 401(k) to an IRA also opens up the opportunity to do a Roth conversion, which most 401(k) plans don’t allow you to do. This is a two-step process: You’ll first need to roll your money from the 401(k) into an IRA, and then convert some or all of the funds in the IRA to a Roth IRA.

Many people (including me) think a Roth conversion can make sense right now because tax rates are likely lower now than they will be in the future. Converting funds to a Roth allows you to lock in lower tax rates today vs potentially paying higher tax rates in the future. For example, say you wanted to convert $100,000 from an IRA to a Roth IRA this year. If you’re in the 25% tax bracket today, you’ll pay less than if you wait and your tax bracket changes to 30%.

Reason #3: Professional investment management

The third reason why it may make sense to move your 401(k) to an IRA is to take advantage of independent investment management and financial planning. While some employer-sponsored plans may offer limited access to a financial professional, an independent financial firm may be able to give you personalized advice that’s tailored to your specific goals.

Some firms will charge a fee to assist only with the investment management portion. I recommend looking for a firm that charges 1% or less and provides comprehensive retirement planning plus investment management for their fee.

A financial professional can provide much more value by providing services like proactive tax planning and retirement income planning. They may also offer health care planning, exploring ways to cover potential long-term care needs or finding your best Medicare options. They might also work with a qualified estate planning attorney and tax professionals to make sure your loved ones are protected and that your money is distributed to your heirs in a tax-efficient manner.

One additional benefit to completing an in-service withdrawal now is that you can still contribute to your 401(k) going forward and get the company match. However, not all employer-sponsored plans allow you to move money from a 401(k) to an IRA while you’re still employed at the company, even after the age of 59½. Your plan documents or administrator can tell you whether your 401(k) plan allows for an in-service withdrawal.

As always, I recommend working with an independent financial professional who will truly act in your best interests. Look for someone who offers comprehensive planning to make sure you get what you pay for and help you avoid making costly mistakes. It’s your retirement — and I encourage you to take steps now so you make the most of it.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Related Content

• Should You Keep Your 401(k) When You Retire?
• Do You Have at Least $1 Million in Tax-Deferred Investments?
• Using Your 401(k) to Delay Getting Social Security and Increase Payments
• Do You Have the Five Pillars of Retirement Planning in Place?
• High-Income Millennials, This Advice Is for You

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The United States is currently in a retirement savings crisis. While not every American at retirement age is in dire straits, many find themselves with insufficient savings to support their desired lifestyle or handle unanticipated costs. In fact, 1 in 5 Americans ages 50-plus have no retirement savings, and more than half are worried they will not have enough money to support themselves in retirement, according to an AARP survey.

The U.S. government has made efforts to address this issue by reforming regulations to encourage companies to offer more robust retirement plan options and incentivize savers. Although these measures have been modestly successful, some Americans still face challenges saving for their financial future.

It's important for everyone to understand that the responsibility ultimately falls on them to ensure they have a financial savings plan in place and are making progress toward it. Some Americans struggle with adequate savings for a variety of reasons, such as low wages limiting sufficient cash flow or emergencies depleting their emergency fund. Additionally, individuals who experience divorce later in life (aka gray divorce) may also be left with depleted financial resources.

Regardless of the reason, it’s always important to try and plan for retirement as soon as possible, even if starting late. By taking the right actions, you can make a difference in your future. Here are four ways to help get started planning for retirement later in life.

1. Take stock of your current and future financial resources

The first step is to inventory your current retirement accounts and savings. If you were automatically enrolled in a workplace retirement plan, locate statements or records of those accounts. If you've changed jobs in the past, it’s not uncommon to have investment balances spread across multiple institutions. Many retirement plans will allow incoming rollovers, so with some effort these balances can be combined into a single account, making tracking your savings much easier. It’s always important as well to evaluate the fees and investment options for your current retirement account. If your plan is costly and offers poor investment options, you may benefit from consolidating old accounts elsewhere, such as in an individual retirement account (IRA).

Several apps are available that can help you link and view all your accounts in one place. While your bank might offer this functionality, you can also consider options like Quicken Simplifi or YNAB. Personally, I use Simplifi, which is similar to the now-defunct Mint. It’s excellent for creating custom spending categories, as well as tracking assets, liabilities and spending. In addition to investments, compile an inventory of your cash savings and any other accounts that may ultimately fund your retirement.

Thinking ahead: Will you be receiving any future income from sources like Social Security, a pension or an inheritance? These should be factored into your retirement planning. Social Security benefits depend on your earnings history and require a certain number of credits to qualify. It’s prudent to review your recorded Social Security earnings to make sure they are being calculated correctly. If you have the ability to increase your earnings in the future, this will also slowly improve your future expected Social Security income, as it is based on your highest-earning years. If you have a private pension from an employer, that should be factored in as well. Be aware that certain pension programs (such as teachers’ pensions) may reduce your expected Social Security payments.

2. Determine a reasonable saving plan (even if you can’t implement it right away)

If you’re not currently saving for retirement, the next step is to review your budget and determine if there is room to start making contributions. Perhaps you have some debt that needs to be paid down first, or you have some expenses that can’t be reduced immediately. The goal should be to start contributing 1% of your income to your retirement savings and then increase that amount over time. A modest goal would be to increase your savings rate by 1 percentage point at the end of each calendar year, which may coincide with annual raises you receive.

Ideally, a good time to increase your savings rate (or deferral to a retirement plan) is immediately when you receive a pay raise. This way, it feels like the increase in savings is coming from your raise rather than your current paycheck. While this may seem like a slow start, simply getting started and staying on the path can pay off in the long run. If you get in the habit of frequently adjusting your savings, it will become too easy to reduce your savings rate when it feels uncomfortable. It’s helpful when your savings are on autopilot and you don’t think about it on a daily basis.

3. Review your expenses

If you have specific retirement goals and don’t want to compromise to achieve them, there are typically two major factors you can influence to help get you there: your expenses and the rate of growth of your portfolio.

Many people used the COVID pandemic as an opportunity to review and adjust their spending habits. Depending on your financial resources, projected assets at retirement (including other income sources) and anticipated spending needs, you might need to revise your budget. A financial adviser can help you create a retirement forecast, or you can use basic calculators available on your 401(k) plan’s website. If your forecasted success rate is good but not high enough that you aren’t worried about running out of money in retirement, you might consider adjusting your discretionary expenses slightly to add a little bit more to your savings each month.

If you are facing a significant gap in your forecasted financial resources and your future needs, it may be time to consider lifestyle changes. We have all faced a lot of challenges in the last several years, with inflation impacting essential needs like shelter, vehicles and food. Everyone can be creative with how they approach necessary changes to their lifestyle. If your job is remote, you may consider relocating to a lower-cost area where you could save a significant amount on rent or a mortgage. Additionally, if you live in a state that is particularly vulnerable to increases in homeowners insurance rates, such as California and Florida, you may need to think long-term about your true home costs.

If you have flexibility in your discretionary spending, such as eating out versus cooking at home or shopping habits— focus on these areas to make adjustments. The sooner you increase your savings, the more you can benefit from compound interest over time.

4. Adjust your asset allocation appropriately

An investor’s asset allocation, or mix of asset types, is usually guided by their risk tolerance and time horizon. If you need to make up for lost time, adjusting your asset allocation can be a useful strategy. For instance, if you’ve traditionally been a conservative investor, you might need to adopt a more moderate or balanced approach. Conversely, if you’re comfortable with an equal mix of stocks and bonds, you may need to shift toward a heavier allocation in stocks or growth assets. If you are unable to increase your savings or simply don’t have a lot of time to catch up, a more aggressive approach may be needed. However, a more aggressive asset allocation comes with additional risk.

A financial adviser can help you understand your options and determine what might be appropriate for your individual situation. There are always available trade-offs to consider – a trusted professional can help you weigh what is most important to you, whether it’s prioritizing the lifestyle in retirement you desire or gaining some additional peace of mind by trying to reduce vulnerability to market fluctuations.

Related Content

• Four Steps to Secure Your Retirement Income
• The Earlier You Take Advantage of Your 401(k), the Better
• How Gen Z’s Retirement Planning and Investing Are Different
• Can't Stick to a Budget? Eight Secrets to Succeeding Long Term
• Nine Things You'll Spend Less on in Retirement

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Changes to IRAs and 401(k)s in 2025 may help you save more for retirement, but you've got to be alert. It's always a good idea to check once a year to see if any new rules or changes are coming to Individual Retirement Accounts (IRAs) and 401(k) accounts. That means keeping track of modifications to existing rules, such as raising contribution limits or updating the requirements for withdrawing money from your retirement accounts.

So, what's on the horizon? The SECURE 2.0 Act contained several changes to retirement plans that are being phased in over several years. These rules apply to traditional IRAs, Roth IRAs and 401(k)s; familiarizing yourself with them can help you save more money for retirement and avoid penalties.

Here are six changes impacting IRAs and 401(k)s in 2025:

1. Super-sized 401(k) catch-up contributions for people aged 60 to 63

Introduced by President George W. Bush in 2001, catch-up contributions allow employees age 50 and older to make additional deposits into their tax-advantaged retirement savings accounts.

The dollar amount is adjusted for inflation, though it may not change every year. For 2025, eligible taxpayers can contribute $23,500 to their 401(k) account, up from $23,000 in 2024. The limit on catch-up contributions for 401(k)s in 2025 for taxpayers 50 and older is $7,500 — the same as it is in 2024, bringing the total contribution limit to $31,000 in 2025.

This new catch-up increases a participant’s catch-up contribution amount. Effective for the 2025 tax year, active participants aged 60 through 63 can contribute the greater of $10,000 or 150% of the 2024 catch-up contribution limit that is indexed for inflation. For 2025, the max catch-up contribution is $11,250. In 2025, the total limit for 401(k) contributions for those aged 60 to 63 is $34,750. That number includes a $23,500 contribution limit and a catch-up contribution of $11,250.

An account holder can take advantage of this additional catch-up contribution if they are between 60 and 63 by the end of the calendar year.

For a detailed look at 2025's new contribution limits for 401(k)s and IRAs, read our story here.

2. Automatic 401(k) Enrollment

In an effort to increase individual retirement savings, SECURE 2.0 requires new 401(k) plans established on or after December 29, 2022, to implement an automatic enrollment feature in 2025 unless an exception applies.

The initial automatic enrollment contribution amount must be at least 3% but not more than 10%. Each year thereafter, that amount is increased by 1 percent until it reaches at least 10%, but not more than 15%.

However, automatic enrollment does not mean mandatory participation. Employees can change the rate or can opt out by electing a zero percent (0%) contribution rate.

3. SIMPLE IRAs and catch-up contributions for people aged 60 to 63

Annual employee deferrals to SIMPLE IRAs had a limit of $16,000 in 2024 but individuals aged 50 or older are allowed to make an additional “catch-up” contribution of $3,500, for a total of $19,500. In 2025, the contribution limit increased by $500 to $16,500 — the catch-up contribution limit for those 50 and over remains the same.

Beginning in 2025, there will be an increase in the catch-up contribution limits for participants who have reached ages 60 through 63. The new catch-up contribution limit will increase to the greater of $5,000 or 150% of the regular age 50 catch-up contribution limit for SIMPLE IRA plans in 2025. Those who are 60, 61, 62, or 63 can contribute $5,250 more to SIMPLE plans for 2025. Cost of living adjustments will begin in 2026.

4. New 10-year rule for inherited IRAs takes effect

In general, for most beneficiaries, the new rules are fairly simple. If you inherited an IRA from someone who died on or after January 1, 2020, you are required to withdraw all funds in the IRA no later than December 31 of the tenth full calendar year following the death of the individual from whom you inherited the IRA.

This rule did away with the ‘stretch IRA’ strategy that allowed owners of IRAs to pass along the assets in the account from one generation to the next while taking advantage of prolonged tax-deferred growth of the assets by using a prolonged distribution period.

However, there are exceptions for inherited IRAs and the following four types of beneficiaries can still utilize the ‘stretch IRA':

• Surviving spouses
• A child of the decedent under the age of 21
• A beneficiary who is not more than 10 years younger than the decedent
• An individual who is disabled or chronically ill

If you are one of the four types of beneficiaries described above, you must still withdraw funds from the inherited IRA over your lifetime beginning in the year following the decedent’s death. A surviving spouse can transfer the inherited funds from the IRA into your own IRA and is not required to start withdrawing funds from your own IRA until you reach your “required beginning date” (“RBD”).

The tax experts at Kiplinger can help you untangle the web of rules and regulations that govern the required minimum distributions (RMDs) from inherited IRAs. Read Inherited an IRA? Five Things Every Beneficiary Should Know and IRS Ends Inherited IRA Confusion: Annual RMDs Required for Many for concise explanations of the new RMD rules.

5. Inherited IRA RMD penalties take effect

The IRS delayed the implementation of the final rules governing inherited IRA RMDs until 2025. However, the IRS has provided transitional relief for beneficiaries who did not take RMDs from their inherited IRAs in 2021 through 2024. Starting in 2025, a 25% penalty will be assessed for those who do not take their RMD.

Read IRS Delays IRA RMD Rules Again to understand which IRA accounts were exempt from the penalties and New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More to understand how to lower the penalty from 25% to 10%.

6. A retirement savings "lost and found"

Older American workers have held over 12 jobs on average in their lifetime, according to the Bureau of Labor Statistics. So, it's understandable that some people may lose track of their 401(k)s or other retirement accounts, which can add up; there are almost a trillion dollars of unclaimed retirement benefits in the U.S.

The SECURE 2.0 Act created a searchable database to help people find those lost retirement benefits accounts. This “lost and found” database is housed at the Department of Labor. The Employee Benefits Security Administration (EBSA) has the responsibility of gathering and uploading the information provided by plan administrators.

The EBSA only started accepting data on November 18, 2024. I would recommend checking back periodically for new and updated information.

You need secure Login.gov account to access the Retirement Savings Lost and Found Database. To establish an ID-proofed Login.gov account, you'll need to provide:

• Legal first and last name
• Date of birth
• Social Security number
• A mobile device
• Front and back photo of an active driver's license

2024 year-end deadlines

• 401(k) Contribution limits and deadlines. For most 401(k) plans, the deadline to contribute is December 31, 2024. This deadline also applies to participants who are 50 or older at the end of the calendar year 2024.
• IRA Conversion deadline. The deadline for converting a traditional IRA to a Roth IRA is December 31, 2024.
• Excess contributions. If you exceed the 2024 IRA contribution limit, you can withdraw excess contributions from your account by the due date of your tax return (including extensions). If you don't you must pay a 6% tax each year on the excess amounts left in your account.
• Required minimum distributions (RMDs). Remember that you face an excise tax on any RMD that you fail to take on time. You must calculate the RMD separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs.

Read More

• Three Changes Coming for Social Security in 2025
• Social Security Payment Schedule for 2025
• Three Medicare Changes on the Horizon for 2025
• New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More

Savers contributed a record amount of money to their Individual Retirement Accounts (IRAs) in the first quarter of 2026, pushing the average balance up more than 7% over the past year despite market volatility, according to Fidelity Investments.

Is your IRA keeping pace? Or falling behind?

Eyeballing average IRA account balances and contribution levels versus other savers in your age group can give you an idea if you're ahead in the savings game, keeping up, or falling behind.

Average IRA balance by age and generation

The average IRA balance for all ages at the end of the first quarter of 2026 was $131,400, according to Fidelity Investments' analysis of its 19.6 million IRA accounts. That was down 4.16% from the fourth quarter of 2025.

However, balances would have been even lower if not for record contributions to IRAs over the past year, according to Fidelity. IRA contributions are up 29% year-over-year. And a record-high number of Fidelity IRA account holders made deposits.

"You can't control market volatility, but you can control your budgets and your savings rate," said Zjamahi Fain, a private wealth adviser at U.S. Bank. "View savings as a fixed expense rather than what's left over (each month). Treat your wealth-building process as a non-negotiable habit."

The bulk of IRA money in the first quarter of 2026 went to Roth IRAs, which are funded with after-tax dollars and allow tax-free withdrawals.

Let's drill down to average IRA balances by age and generation in the first quarter of 2026 to get a more precise picture of how much other workers in your age band have set aside. These totals include contributions, appreciation, and rollovers.

Source: Fidelity Investments

Here is a summary of other findings from the Fidelity report.

• IRA losses of roughly 4% in the first quarter of 2026 were largely due to a stock market selloff in March sparked by the U.S. attack on Iran and soaring gas prices.
• IRA balances continue to grow over the long term thanks to record contributions, compounding interest and stock market appreciation.
• Roth IRAs are the most popular retirement savings choice among younger generations.

What the experts are saying about IRA balance changes

Bob Mascialino, Fidelity:

"We're encouraged to see investors creating thoughtful, long-term strategies to build wealth," says Bob Mascialino, president of wealth at Fidelity Investments. "Choices like increasing contributions to Roth accounts reflect a focus on flexibility, tax efficiency, and confidence in planning for the future."

Erin Kolo, Baird:
There are two lessons to glean from the latest snapshot of IRA balances, says Erin Kolo, senior VP and manager, PWM equity and fixed income research at Baird.

"The first is that it is super important to choose an investment strategy that you can stick to, regardless of market turbulence," Kolo says. "The second lesson is the importance of ensuring that your IRA is invested appropriately so that it can weather drawdowns, especially for those closer to retirement."

Emelia Fredlick, Morningstar:
Despite periodic market volatility, such as recent turbulence caused by the U.S. attack on Iran, there's no need to think short-term, notes Emelia Fredlick of fund-tracker Morningstar. After analyzing stock market crashes over the past 150 years, Fredlick concluded: "Though they varied in length and severity, the market always recovered and went on to new highs. If you don't panic and sell your stock holdings when the market crashes, you will be rewarded in the long run."

The care and feeding of your IRA

With traditional pensions on the verge of extinction, the burden of saving for retirement increasingly falls on workers. IRAs are an especially important savings tool for self-employed folks and small business owners who don't have a workplace retirement plan. Total IRA assets were $19.2 trillion at the end of December 2025 (the latest available data), accounting for 39% of total retirement assets of $49.1 trillion, according to the Investment Company Institute.

What jumps out from the Fidelity data is how IRA account balances for older, long-term savers balloon thanks to regular contributions and the tendency of stocks to rise over time. The takeaway (especially for younger savers)? It’s not impossible to accumulate a sizable nest egg.

"Staying disciplined and staying the course will help you cancel out the noise and achieve your financial objectives," said Fain, adding that you should make sure your portfolio is properly diversified to handle different market scenarios.

What looks like a puny account balance today can add up to hundreds of thousands of dollars. Compounding, or earning returns on both your original investment and prior gains, is a powerful force in building retirement savings.

In fact, IRA balances at the end of March 2026 were 46% higher than they were 10 years ago, according to Fidelity. When it comes to saving for your golden years, Fidelity recommends saving 15% of your income, although that includes workers with 401(k)s who get a company match.

If savers have a workplace retirement savings plan, they should consider investing in an IRA only after saving enough in their 401(k) to receive the full company match, says Rob Leiphart, VP of financial planning at RB Capital Management.

Both traditional and Roth IRAs allow your contributions and gains to grow tax-free. However, traditional IRAs are funded with pre-tax dollars, which gives you an upfront tax deduction, but requires you to pay taxes on withdrawals at your regular income rate. In contrast, Roth IRAs are funded with after-tax dollars but come with tax-free withdrawals in retirement.

Roth IRAs are increasingly popular with the younger generations. Roth IRAs accounted for 67% of all IRA contributions in the first quarter of 2026. And Roth conversion transactions increased 41% over the past year, according to Fidelity.

What you should have saved, by age

• Fidelity recommends having at least six times your salary saved for retirement by age 50.
• IRA account holders essentially doubled their money each decade until their 40s, and continued to enjoy double-digit growth to retirement, thanks to the power of compounding.
• Generally, "super savers" regularly contribute to a retirement account and max out contributions up to IRS limits.

Let’s see how IRA balances by age, or savings during each decade of life, stacked up at the end of the fourth quarter of 2025.

To help savers get a better guesstimate of whether their savings are on track for a secure retirement, we’ve also included Fidelity's guidelines as to how much of one's salary should be saved by the start of each decade in a saver's life. For example, Fidelity recommends that someone turning 50 should aim to have at least six times their salary saved by then. So, if you earn $100,000 at age 50, you should have at least $600,000 set aside by then.

Again, notice the power of compounding when building wealth. In each 10-year period, starting with savers in their 20s, IRA account holders essentially doubled their money each decade in the first half of their careers. They continued to see healthy growth beyond their 40s. The key takeaway: the modest average IRA balance of $56,175 in the 30s age bracket mushrooms into a $207,504 nest egg two decades later.

The secret of "super savers," personal finance experts say, is regularly contributing to a retirement account like an IRA and, if possible, maxing out contributions up to IRS limits. They also recommend investing in stocks for growth during peak earning years and implementing a buy-and-hold strategy to capture the full benefits of compounding.

For a more comprehensive look at how your savings compare to peers, see our articles on The Average Net Worth by Age, The Average 401(k) Balance by Age and The Average Retirement Savings by Age. To get a handle on projected medical expenses, see Average Cost of Health Care by Age and US State.

Pros and cons of IRAs

• The biggest advantage of IRAs is the tax benefits they offer.
• IRAs tend to offer a wider range of investment choices than a 401(k).
• One key drawback of IRAs is their much lower annual contribution limits compared to 401(k)s.
• Early withdrawals from your IRA before age 59-1/2 are subject to a 10% penalty (plus regular income tax), with fewer exceptions than 401(k) loans or hardship rules.

The biggest perk of IRAs is the tax benefits they offer. IRAs, which are held in brokerage accounts, also offer a wider range of investment choices than a 401(k), which has a limited menu of options. “If you want to buy individual stocks, or if you want to do something that you can’t do within a 401(k) because it’s not one of those 20 or 25 investment options, then the IRA serves as a great diversification tool,” said Leiphart.

Roth IRAs also give you more flexibility in getting at your money without paying an IRS penalty. You can take out your contributions at any time, since you’ve already paid taxes on the money used to fund your Roth IRA.

IRAs are also a great landing spot for assets from old 401(k)s. Rolling over old retirement accounts and balances into a single IRA is a good way to consolidate your accounts.

On the negative side, the amount you can contribute to an IRA each year is much lower than the amount you can sock away in a 401(k). In 2026, for example, the IRS limit on IRA contributions is $7,500 (or $8,600 for those 50 or older), according to the IRS. In contrast, participants in workplace 401(k) plans are able to contribute up to $24,500, with $32,500 for savers 50 and older in 2026. Savers in 401(k) plans aged 60, 61, 62 and 63 are able to make a super catch-up contribution of $11,250 (or $3,250 more) in 2026, if their company allows it. (The deadline for 2026 IRA contributions is April 15, 2027.)

Be sure to review income eligibility rules for IRAs.

An IRA can help your retirement savings catch up

• Setting up automatic contributions to your IRA can help boost your retirement savings.
• Boosting your contributions when you get a raise can add up in future years.
• Saving in a workplace 401(k) doesn't mean you can't save in an IRA too.

Just because you’re saving in a 401(k) doesn’t mean you can’t save in an IRA.

One way to boost your retirement savings via an IRA is to automate the process by setting up automatic contributions that coincide with each pay period, just like your 401(k) at work, says Leiphart. And if you’re tight on cash now, you can plan on saving a little more in future years, say 1% more each year, when you get your annual raise, adds Leiphart.

Get the full story: what you're worth

Want to see how more of your retirement portfolio compares to peers? Read:

The Average Net Worth by Age,

Average Retirement Savings by Age,

The Average 401(k) Balance by Age,

Average 401(k) Match: Do You Work for a Generous Company? and

The Average Social Security Check by Age.

Read More About IRAs

• Quiz: Understanding Roth Conversions
• IRA Conversion to Roth: Rules to Convert an IRA or 401(k) to a Roth IRA
• How to Open a Roth IRA in Five Simple Steps
• How to Convert a Traditional IRA to a Roth after 60

Endowment funds such as Yale University’s, which focuses on investment alternatives, have been great examples of multi-asset-class investing strategies over the last two decades. Case in point: Yale’s endowment experienced $759 million in investment gains for the year ending June 30, 2023, according to its 2022-2023 financial report.

In addition to diversification, alternatives also offer potential investment opportunities that often have a low correlation to volatility in traditional markets.

Yale’s fund has access to top-tier fund managers, but by adopting investment principles in relation to alternatives, individual investors can design their own portfolios so that they have the potential to achieve similar risk-adjusted returns. This strategy has paid off for the endowment, particularly when traditional equity and bond markets experience economic fluctuations.

While one may invest in alternatives in many ways, an often-overlooked strategy is investing your tax-advantaged retirement savings. This can be done through an investment vehicle known as self-directed IRAs, or SDIRAs. These accounts aren’t distinct IRA types, but rather, “self-directed” refers to the account’s management style, in which investors or advisers take on management duties.

Traditional IRAs or Roth IRAs can be self-directed, but the main difference is that with SDIRAs, people can invest in alternative assets. Alternative assets may help reduce exposure to market volatility, as many have low correlations with public markets, and may be more suited for long-term strategies since many of these assets are less liquid.

Specifically, SDIRAs can hold alternative assets like private equity, hedge funds, commodities and marketplace loans, but real estate has historically been one of the most popular investments. Although there are restrictions on using a real estate property held in a SDIRA for personal use, you can invest in any type of property assets, including rental properties, land and commercial properties.

Access to alternative markets

Historically, many alternative assets required an accredited investor, an investor with a special status under financial regulation laws. However, we have seen many types of alternative investments that do not require an accredited investor. Today, many alternative investments are more broadly accessible. So, for example, if someone wants to put a $5,000 investment into alternatives, they have many options to choose from.

However, the opportunity for greater diversification comes with greater responsibility, as the investor does need to manage SDIRAs themselves. If managed prudently, this vehicle also offers the opportunity for greater returns, due to the wider variety of investment options, especially if you have expertise with a specific asset type.

Everyday investors frequently know the market better in the region in which they live, so whether it's real estate or an opportunity for a new restaurant, if they’re familiar with that particular space, they’re likely more comfortable allocating some of their retirement capital to that investment.

2024 outlook

Nearly half of all Americans are at risk of a financially insecure retirement, up from one-third in 1983, according to a 2024 Senate committee report. And, as BlackRock CEO Larry Fink emphasized in his 2024 letter to investors: Longer lifespans mean Americans need to save more money to live on throughout their sunset years. SDIRAs offer Americans a great opportunity to put their retirement savings to work beyond the standard target date funds that many 401(k)s favor.

It is critical, though, to consult a qualified financial adviser. SDIRAs offer the opportunity for individual investors to correlate their investments with their risk appetite. However, every investment has its complexities. For example, some alternative assets have low liquidity, meaning it can be difficult to access them or sell them quickly — if at all — without a loss in value.

Also, the IRS has strict rules about SDIRA-prohibited transactions, which are aimed at preventing direct personal benefits to the account holder or other disqualified people, such as family members. (For example, using an SDIRA to invest in a business that is owned by the investor’s spouse.) Prohibited transactions can result in tax penalties or losing the account’s tax-advantaged status altogether.

SDIRAs can open the door to a wide range of alternative assets with a return pattern that can potentially benefit the end investor. Ultimately, better access to these investments, which have proven successful for endowments like the Yale fund, gives investors another viable avenue to help grow their retirement savings and improve their overall financial wellness.

Related Content

• Can I Hire a Financial Adviser to Manage My 401(k)?
• How to Capitalize on Self-Directed Brokerage Accounts
• Do Alternative Investments Belong in Your Retirement Plan?
• How to Get into Alternative Investing
• Should You Use a Roth or Traditional IRA?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If there’s one thing I’ve learned in my decades in finance, it’s that there’s rarely one right way to handle financial decisions — except when it comes to rolling over your 401(k).

Transferring funds from your 401(k) to an individual retirement account (IRA) can be a wise move. It offers greater control over your investments and potentially more diverse investment options. However, the 401(k) rollover process requires thinking ahead and planning each step carefully, because there are numerous pitfalls and nuances to navigate.

Retirement accounts, including 401(k)s and IRAs, will be a major source of income for the nearly 30 million people set to retire by 2030. If you’re one of them, it’s crucial to make the right choice.

Here’s what you need to know to roll over your 401(k) funds — and, consequently, transition into retirement — with no regrets!

First things first: The right way to roll over without paying taxes or a penalty

A rollover involves moving money from a 401(k) plan to another tax-advantaged retirement account, typically an IRA.

Before even starting the rollover process, weigh the pros and cons of keeping your funds in your current employer’s retirement plan. Every 401(k) plan is different, with some offering benefits that might outweigh the advantages of your own IRA. For example, it’s not the norm, but if your company is willing to offer matching contributions even after you leave, it’s worth checking into it first.

In my experience, most people benefit from rolling over their 401(k) balances into their own individual retirement accounts, but only when they do it the right way. And that way is called a “direct rollover” or trustee-to-trustee transfer. It’s the safest option, because your funds are transferred directly from your 401(k) to your IRA custodian. This is how you avoid a huge tax bill and potentially steep penalties.

Generally, it works by opening a rollover IRA with the same tax status as your 401(k) plan at a discount brokerage firm, such as Schwab or Vanguard. If you have both traditional and Roth contributions, set up corresponding receiving accounts and get the account number from your investment firm. Next, contact your employer’s 401(k) plan administrator and request a direct transfer, emphasizing that you want a transfer — not a check written out to you. This ensures the check is made out to your new IRA custodian, avoiding complications.

I cannot emphasize this enough: Never take the money out yourself. Once you’re holding a check that is made out to you, 20% of your account balance will be withheld for taxes, and you’ll need to deposit the full amount into your IRA within 60 days. Failing to do this results in taxes and penalties, especially if you’re under 59½. A check would need to be made out to the institution's (or custodian’s) name for your benefit.

Celebrate your transfer: But don’t forget to invest it

Another key piece to doing a 401(k) rollover the right way is to continue investing and decide how you want to invest those funds once they’re transferred into your IRA.

This is where people make costly mistakes. According to a recent Vanguard report, about 28% of savers who rolled over their 401(k) funds into an IRA in 2015 left the money sitting as cash for at least seven years. This mistake costs savers a collective $172 billion per year, or an eye-popping $130,000 per person, in forgone wealth by the time they reach retirement age.

Remember, once the funds are rolled over to your IRA, they don’t automatically get invested in the same investments you had in your 401(k). While earning 4% or 5% in cash is acceptable, diversification remains the key to retirement income stability and protecting your portfolio from inflation. That means you have to make those investments yourself.

Additionally, be careful about email messages or rollover recommendations you receive from your in-plan 401(k) adviser promoting their annuities or other retirement income solutions before you retire. You want to avoid making decisions under pressure, especially if it feels like a hard sell. This is your life savings, and the investments presented to you may or may not be in your best interest, so take the time to understand the pros and cons beforehand.

Get unbiased advice from a fee-only, fiduciary adviser

Ultimately, I believe it’s a good idea to collaborate with an experienced fiduciary adviser on all your rollover details, not the least of which are smart tax planning strategies.

While you might not feel you “need” investment advice, if you’re thinking through a 401(k) rollover, it’s worthwhile to sit down with a fee-only financial adviser. An adviser can help you develop a comprehensive and resilient financial plan that considers your situation, future cash flows and your desired lifestyle, up to and through retirement. This deep dive should also include pros and cons of strategies for Roth conversions, as well as evaluating your RMDs (required minimum distributions) and the best options for claiming Social Security benefits.

A highly qualified fee-only adviser who specializes in retirement income planning should also help develop a game plan to keep fees and investing costs low, thereby boosting your returns. Don’t just take it from me. Studies show that individuals with a written financial plan are about three times more likely to achieve their financial goals.

Why fee-only? Because it means the adviser works directly for you and is not getting paid to sell insurance or mutual funds. In the case of a 401(k) rollover, for example, a fiduciary adviser will analyze and compare the fees and expenses of a workplace plan vs an IRA, assess the services and investments available in both, and provide necessary disclosures to help you make an informed decision.

Your rollover is essentially your future paycheck for the rest of your life. Therefore, who advises you can significantly impact your financial future. Unbiased advice isn’t just about your investments; it encompasses your family, personal lifestyle, spending habits, taxes and overall investment strategy. So, if you have a spouse with a rollover decision to make, too, consider planning together to get a complete picture of your financial future and ensure you’re getting qualified, personalized advice.

Sure, you don’t need to hire an adviser. Just remember that regrets often stem not from what you did, but rather from what you didn’t do.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

IRAs (Individual Retirement Accounts) are certainly popular. According to research from the Investment Company Institute (ICI), about 55.5 million US households owned these accounts. There are a few reasons why so many investors favor IRAs, but chief among them is that an IRA provides valuable tax benefits, which can boost your nest egg. ICC estimates that – for those who have held their IRAs for at least ten years – the average balance is $280,000.

It's important to understand how to use these powerful savings tools. And you will need to decide which type is best for you: traditional, Roth, SEP or SIMPLE?

What is an IRA?

An IRA is not an investment. Rather, an IRA is an account that holds investments, such as stocks, bonds, mutual funds and ETFs (exchange-traded funds). Some accounts even allow investing in real estate, though the IRS prohibits certain types of assets like collectibles.

“For those without access to a retirement savings plan through their employer, an IRA is the perfect way to benefit from tax-advantaged savings that would otherwise be inaccessible,” said Michelle Riiska, who is a ChfC and planning consultant at eMoney Advisor, the second largest wealth management platform in the US.

There are two types of IRAs for individuals: traditional IRAs and Roth IRAs. There are also plans available for those who are self-employed or own small businesses.

How an IRA works

For traditional IRAs and Roth IRAs, the contribution limit for 2024 and 2025 is $7,000. If you are 50 or older, you can make a “catch-up” contribution of $1,000. You can make contributions for the current year by the tax filing deadline of the following year, which is typically April 15th.

But you can only make contributions with earned income. Earned income includes wages, salaries, tips, bonuses, commissions and net earnings self-employment income. But it does not include items like interest, capital gains, rental income, dividends, pensions, unemployment compensation and annuities.

There is an exception if you have a non-working spouse and file jointly. For example, suppose you have earned income of $60,000 and your spouse has no income. You can set up an IRA for $7,000 for yourself and a separate, spousal IRA of $7,000 for your partner. However, if your income was lower than the combined contribution of $14,000, then you can only allocate the amount up to your annual income.

Once you've settled on an IRA, your next decision will be whether to get a Roth IRA or a Traditional IRA.

Traditional IRA

If you or your spouse do not have an employer retirement account — like a 401(k) plan — you can make tax-deductible contributions to a traditional IRA. Otherwise, the deduction is phased out based on your income. But you can still make nondeductible contributions.

On the earnings of your IRA, the taxes are deferred until you make withdrawals. If you do not do this before reaching age 59 ½, you will pay income taxes on the amount and a 10% penalty. But there are exceptions, such as:

• Total and permanent disability
• Health insurance premiums while unemployed
• Unreimbursed medical expenses
• Expenses for higher education
• First-time home purchases up to $10,000

Let’s take an example of how the taxes work with a traditional IRA. You have an annual income of $80,000 and make a $7,000 contribution. This lowers your taxable income to $73,000, which means you get a $1,540 tax savings (22% of $7,000). For the year, the capital gains and dividends are $400, which is not taxable. This gives you an additional savings of $88.

A traditional IRA is subject to required minimum distributions (RMDs), meaning you need to withdraw a small percentage of the account each year. Owners of traditional IRA accounts must start taking RMDs when they reach age 72 (73 if you are age 72 after Dec. 31, 2022). Due to the SECURE 2.0 Act, the RMD age will rise again to 75 in 2033. This RMD rule applies even if you are retired. If you do not make the distributions when required, the penalty is 25%.

Roth IRA

You cannot deduct your contributions to your Roth IRA, but the taxes on the earnings in the account are deferred until they are withdrawn.

So, what’s the advantage of a Roth IRA? You can take out the contributions in your account tax-free without penalty. As for the earnings, they are also tax-free if you make the withdrawals when you are 59 ½ or older and have held the Roth IRA for at least five years.

However, there are restrictions on your contributions. The amount is phased out based on your modified adjusted gross income (MAGI). For example, if you are single or file jointly, then the phaseout period begins at $146,000 and $230,000 for 2024. For 2025, the phaseout begins at $150,000 and $236,000 respectively. If you are bumping up against those income levels, you can still qualify for Roth IRA contributions by lowering your income. Several strategies, like contributing to a Health Savings Account (HSA), can lower your MAGI and set you up for a more secure retirement.

A Roth IRA can be beneficial if you expect to be in a higher tax bracket. But there are other benefits. For example, there are no RMDs and you can pass your account tax-free to your heirs.

“The choice of contributing to a traditional IRA and Roth IRA is not all or nothing,” said Rob Williams, managing director of financial planning at Charles Schwab. “We suggest that investors consider contributing to both, dividing the amount half and half, or in a proportion that meets your current needs, budget, and preference for more flexibility and less tax for when you reach retirement.”

Spousal IRA

Spousal IRAs not only give a nonworking spouse a measure of retirement security, but the contributions allow the couple to save more for retirement on a tax-advantaged basis and reduce tax liability.

If one spouse has earned income and the couple files a joint tax return, the working spouse can contribute to an IRA in the non-working spouse’s name. Spousal IRAs are an ideal way for spouses who plan to take time out of the workforce to continue to save for retirement.

The total contribution to a spousal IRA can’t exceed the taxable income reported on the couple’s joint federal tax return. Regardless of who contributes to the account, the account is owned by the nonworking spouse, and it is theirs to keep, even if the marriage ends in divorce.

Rollovers and conversions

A "rollover" refers to moving funds from one type of retirement account to another, usually tax-free. If you have a 401(k), you may want to roll over the account into an IRA when you leave your job or retire. Some employers allow this type of rollover when you reach 59-½ and remain an employee.

There are key advantages to a rollover compared to cashing out of your 401(k). A rollover allows you to continue to benefit from the tax deferral of the IRA, which will help you build your retirement nest egg.

Your IRA will have many more investment options, and the fees may also be lower.

Keep in mind that there are two types of rollovers:

Direct Rollover: The plan administrator of the 401(k) transfers the amount in the account directly to the IRA. This method is straightforward and avoids potential tax issues.

Indirect Rollover: You receive the funds from your 401(k) and then have 60 days to deposit them into an IRA. Otherwise, the amount will be subject to income taxes and a 10% penalty if you are younger than 59-½. Your employer may also withhold 20% in taxes. While you can reclaim this withheld amount when you file your taxes, it can be a hassle. Due to these issues, it’s usually best to use a direct rollover.

You can also roll over your 401(k) into a Roth IRA. However, the IRS considers this a conversion. That's because the regular 401(k) defers taxes, while a Roth IRA does not. This means you will owe income taxes on the amount of the distribution, which could be significant.

You may also convert a traditional IRA into a Roth IRA.

IRAs for the self-employed and small businesses

SEP IRA. A SEP IRA (Simplified Employee Pension Individual Retirement Account) is for someone who is self-employed or has a small business. The owner is the only one who can make contributions to the account. They will also be required to make contributions for employees who are at least 21 years old, have worked for the business for at least three of the last five years and have received a minimum of $750 income in 2024. Because of this, the owner will usually have a SEP if there are few or no employees.

The main advantage of a SEP IRA is that you can contribute up to 25% of compensation, with a maximum of $70,000. These contributions are tax deductible and the earnings are deferred from taxes. However, there is no catch-up contribution for older workers.

SIMPLE IRA. If your business has employees, a better option is the SIMPLE IRA (Savings Incentive Match Plan for Employees). In fact, this can be a great way to recruit and retain employees. Moreover, when compared to a 401(k), there is generally less paperwork and lower costs.

With this type of account, each employee will have their own account and the contribution limit is $16,500 for 2024 and $16,500 in 2025. If the employee is age 50 or older, then there is a catch-up contribution limit of $3,500 for 2024 and 2025.

Beginning in 2025, there will be an increase in the catch-up contribution limits for participants who have reached ages 60 through 63. The new catch-up contribution limit will increase to the greater of $5,000 or 150% of the regular age 50 catch-up contribution limit for SIMPLE IRA plans in 2025. Those who are 60, 61, 62, or 63 can contribute $5,250 more to SIMPLE plans for 2025.Cost of living adjustments will begin in 2026.

However, an employer is required to make contributions on behalf of employees. This is either a dollar-for-dollar match of up to 3% of compensation or a flat rate of 2% of compensation, which is capped at $350,000.

For both a SEP IRA and a SIMPLE IRA, you will pay taxes on the withdrawals from the account. There is a 10% penalty if this is done before reaching age 59-½. As for a SIMPLE IRA, the penalty is 25% if the withdrawal was completed within two years of participation in the plan.

Read More

• Should You Use a Roth or Traditional IRA?
• SEP IRA vs. Solo 401(k): Which Is Better?
• Traditional IRA Basics: 10 Things You Must Know
• The Average 401(k) Balance by Age

When it comes to retirement planning, the traditional IRA is a workhorse, enabling you to sock away earned income. According to a report from the U.S. Bureau of Labor Statistics in 2022, about 31% of private industry workers did not have access to employer-provided retirement plans like 401(k)s. The traditional IRA (Individual Retirement Account) can help fill that gap.  A traditional IRA provides valuable tax benefits, such as the deduction of contributions and the deferral of taxes on the earnings in the account.  

“With the increasing number of individuals taking on side jobs, starting new businesses, or working as an independent contractor, the ability to open an IRA to save for retirement is key,” said Jennifer Kohlbacher, who is the director of wealth strategy at Mariner.

However, traditional IRAs are subject to many rules, and violations can result in costly penalties. So, let's examine what you need to know.

Traditional IRA basics

There are contribution limits. For 2024 and 2025, you can contribute up to $7,000 to a traditional IRA. But when you reach 50 or over, you can make a “catch-up” contribution of $1,000.  

All contributions must be from earned income. This includes wages, commissions, tips, bonuses and net earnings from self-employment income. However, many income sources do not count, such as interest, capital gains, rental income, dividends, pensions, unemployment compensation and annuities.  

Contributions can lower your next tax bill. Let’s take an example of how a traditional IRA works.  Suppose you are 53 and married, with earned income of $80,000. You can contribute up to $8,000, which includes the $7,000 maximum plus the $1,000 catch-up contribution. You have until the tax filing deadline of the following year — typically April 15th — to make these contributions for the current tax year.

Your spouse, who is 48, does not have earned income. But they can have an IRA too. This is known as a spousal IRA. You can tap your own earned income to make the contribution.  In other words, you can make combined contributions of $15,000, and they are deductible. This means that your taxable income is $65,000 ($80,000 minus $15,000) and the tax savings are $3,300 ($15,000 multiplied by 22%).

You have investment choices. With these contributions, you can invest your IRA in stocks, bonds, mutual funds and ETFs. Some IRAs, called Self-Directed IRAs, even allow investments in cryptocurrencies and real estate. But there are some restrictions, such as collectibles.

Earnings from these investments are tax-free — that is, until you make withdrawals. So if you have $500 in capital gains and dividends, you would have an additional $110 in tax savings.

Withdrawals

You can withdraw funds from your IRA at any time. But if you do this before reaching 59 ½, you will be subject to paying a 10% penalty and income taxes on the amount. 

The IRS does provide exceptions to the 10% penalty, though not on taxes due, in the following cases:

• Total and permanent disability
• Health insurance premiums while unemployed
• Unreimbursed medical expenses
• Expenses for higher education for you, your child and even your grandchild
• First-time home purchases up to $10,000
• Losses incurred due to federally declared disasters
• Substantially Equal Periodic Payments (SEPPs), sometimes used by those hoping to retire early

While it may be tempting to take a penalty-free withdrawal, retirement planning experts discourage their clients from making early withdrawals.  

“This can create a ripple effect with significant financial repercussions,” said Gerard Longo, who is the director of retirement plans for Global Wealth Advisors. “An early withdrawal means these funds will no longer benefit from tax-deferred growth. Early distributions can also disrupt your long-term financial planning and may result in a smaller nest egg when you retire. Less money saved for retirement may also hasten the depletion of other savings and even borrowing in retirement. Making an early withdrawal may even push you into a higher tax bracket.” 

Drawbacks

 
While a traditional IRA can be a great way to boost retirement savings, it has some drawbacks.  

First, there may be negative tax consequences if you or your spouse are covered by an employer plan. In this case, you can still contribute to an IRA, but the deduction based on your income is phased out.  

Another disadvantage is that you are subject to required minimum distributions (RMDs). Based on legal requirements, you must start withdrawing from your IRA when you reach age 72 or 73. Not doing this will result in a 25% penalty.

Finally, the tax benefits of an IRA will be diminished if you are in a higher tax bracket when you retire. So, if tax rates are higher or you have more income during your retirement, you could ultimately have a larger tax burden.

The alternative: Roth IRAs

You might want to consider a Roth IRA if you suspect you'll be in a higher tax bracket during retirement than in your working years. That's because Roth IRAs do not provide tax deductions for contributions, but rather, the withdrawals are generally tax-free so long as you meet certain requirements.

And there are other benefits. “Roth IRAs do not mandate RMDs during the account holder's lifetime, allowing the funds to continue growing tax-free for as long as the account remains open,” said Julio Bedolla, a wealth manager at LourdMurray. “Another advantage of Roth IRAs is their effectiveness as tools for estate planning. Heirs can inherit the account and continue to benefit from its tax-free growth. While recent changes have limited the time period for which these benefits can be extended, Roth IRAs remain valuable in planning for the next generation.”

There are contribution limits and income requirements for Roth IRAs, so do your homework before you decide between a Roth IRA or a traditional IRA.

Read More

• How to Convert a Traditional IRA to Roth after 60
• SIMPLE IRA: What It Is and How It Works
• SEP IRA vs. Solo 401(k): Which Is Better?

Chances are your retirement nest egg is worth less than you think.

For example, if you and your spouse have $1 million in retirement savings tucked away in traditional IRAs, 401(k)s or 403(b)s, your nest egg is likely to be worth $760,000 at the 24% marginal federal tax bracket.

Combine the bite that federal taxes will take out of your retirement savings with the potential additional hit of state and local income taxes and inflation, and you may already be seeing your retirement goals getting harder to reach.

Why taxes hurt in retirement

Taxes have the potential to hit you hard in retirement due to the way the retirement savings and tax systems are set up. If you are a Baby Boomer or Gen Xer, you’ve spent most of your life saving within traditional retirement savings vehicles because that’s all that was available for many decades. And even though Roth IRAs and Roth 401(k)s have been around for a while, they aren’t nearly as widely used as traditional IRAs, 401(k)s and 403(b)s.

The tax deductions that traditional retirement savings vehicles offer upon contribution are popular, which is one reason why contributions into Roth accounts lag behind traditional accounts. The downside of those deductions means that taxes must be paid when you withdraw your appreciated savings in retirement.

And those withdrawals are not optional. When you turn 73 — or 75, if you were born in 1960 or later — you must take what is known as required minimum distributions (RMDs) each year based on your life expectancy as calculated by the IRS. It doesn’t matter if you don’t need the money for your living expenses — you must take RMDs or face IRS penalties.

You may need to withdraw more than the RMDs required to fund your standard of living in retirement, which means — you guessed it — more taxes.

These taxes can have a cascading effect in retirement. Not only do they reduce the amount of assets you have to spend on maintaining your lifestyle and all the potential health care expenses that retirement brings, but they can also increase other costs, such as the tax on your Social Security benefits and the amount you pay in Medicare premiums.

If you are married and have a combined income of more than $32,000 a year in retirement, 85% of your Social Security benefits will be taxed; if you are single and your combined income exceeds $25,000, that same tax rate applies. Combined income includes your adjusted gross income from your federal tax return, tax-exempt interest and half of your Social Security benefits.

Because Medicare premiums are income-based, as your taxable retirement income rises — through a combination of your Social Security benefits, RMDs, other withdrawals from traditional IRAs and any other sources of income, such as rent from rental properties or Airbnbs, an annuity, taxable interest and dividend income or a defined benefit pension — your Medicare premiums may increase.

If you are married and your modified adjusted gross income is less than or equal to $206,000 a year, your total individual Medicare Part B coverage is $174 a month. If your income jumps to more than $206,000 but less than $258,000, your monthly premiums will increase to $244.60. In 2024, Medicare Part B premiums top out at $594 for couples with modified adjusted gross income of greater than or equal to $750,000 a year.

There is also the potential that taxes could increase during your retirement. It’s no secret that the U.S. budget deficit is rising at a time when spending on entitlements such as Social Security, Medicare and Medicaid is also rising. That means you could be on the hook for an unknown higher amount of taxes at some point during your retirement.

Finally, there’s the fact that you’re usually living on a fixed income in retirement. When you’re working, there’s always the potential to make more money — but when you’re retired, what you have saved is all you are ever going to have.

Fortunately, there are three steps you can take to help mitigate your taxes in retirement, including converting traditional IRA assets to a Roth IRA, contributing to a Roth IRA or 401(k) if you are still working or utilizing tax-advantaged annuities or certain cash value life insurance policies.

Step 1: Convert part of your traditional IRA to a Roth IRA.

When you convert all or part of your traditional IRA to a Roth IRA, you pay taxes now so that you won’t have to pay taxes in the future or be subject to RMDs. While that can seem painful, if you’ve got the cash available elsewhere, you will be paying taxes now so you can avoid paying more taxes later. It’s important not to pay taxes with money you withdraw from your traditional IRA, because that will just increase your tax bill.

It’s important to approach this process intelligently, so you should speak to a tax adviser or accountant about how much you are likely to earn in the tax year you want to convert and how much “room” there is in that tax bracket to potentially convert some of your traditional IRA.

For example, if you are in the 24% tax bracket and you are married filing jointly with a taxable income of $250,000, you have $133,900 of “room” in the tax bracket before you would hit the next bracket, which is 32%. That means you would want to convert less than that amount to avoid kicking yourself into a higher tax bracket.

If you chose to convert $120,000 at the 24% federal rate, you would owe $28,880 in federal taxes and would also owe state taxes if you live in a state with a state income tax, although your specific tax bill will depend on your individual tax situation. Roths are subject to other rules that you should discuss with your tax adviser.

Ideally, you would work with your accountant to create a strategy over a number of years to gradually convert all of your traditional retirement assets to a Roth, while keeping yourself from being kicked into a higher tax bracket. (For more about this topic, see the article Roth Conversions: Convert Everything at Once or as You Go?)

Step 2: Contribute to a Roth 401(k) at work.

Nearly 90% of employers who offer employees a 401(k) account also offered the Roth 401(k)in 2023. By switching your contributions from a traditional 401(k) to a Roth 401(k), you will lose the immediate tax deduction that you would have otherwise received, but you will then reap the benefits in retirement.

You will also continue to reap the benefits of any employer match that you are currently getting by contributing to your company-sponsored retirement account. You will also be creating tax diversification within your retirement assets, which will give you more choices in retirement about how to take the tax hit from traditional retirement accounts.

Imagine a retirement free from at least some RMDs and taxes — that is what ongoing contributions to a Roth 401(k) or 403(b) will get you.

Step 3: Leverage life insurance and annuities.

If you don’t have money outside of a traditional IRA to pay conversion taxes but still want to minimize your taxes in retirement, or exceed the earnings limitations for a Roth account, don’t fret. You can take advantage of specific types of annuities and life insurance to get the job done.

You can purchase whole life insurance and use the cash value to pay the taxes on a series of conversions over time with a goal of converting all of your traditional IRA assets to a Roth. If you die before the full conversion of your traditional IRA assets occurs, your heirs can use the life insurance to pay the taxes that are due within 10 years of inheriting a traditional IRA.

The second strategy is to purchase a bonus annuity, which is a type of annuity contract that provides an upfront bonus upon purchase. The bonus increases your account value. You can then make partially taxable withdrawals from that annuity to pay for the taxes due on a Roth conversion.

A final word

Minimizing your taxes with a well-thought-out strategy is a gateway to a more confident retirement. It’s how you can potentially have the lifestyle you want, while paying as little in taxes as possible.

Licensed Insurance Professional. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

The information contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional tax advice for applicability to your personal situation.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Traditional IRA withdrawals can push more of your Social Security into the taxable zone, up to 85%, which can add up over time. That's why it's important to get smart about when and how you pull money from your traditional IRA, helping you keep thousands more in your pocket every year.

Pairing Social Security with your IRA is one of the best ways to power your retirement, but skip the tax surprise. Done right, it’s a powerful income strategy — done wrong, it can quietly eat a big chunk of your retirement cash.

Let’s take a deeper look at how IRAs impact your Social Security.

How IRAs impact Social Security: Taxes on Social Security benefits

As much as 85% of your Social Security benefits are subject to federal income taxes. This is based on your “combined income,” or your adjusted gross income (AGI) plus nontaxable interest and half your annual Social Security benefits. You will include your spouse's combined income if you file jointly.

As for the AGI, it includes wages, interest, investment income and distributions from traditional 401(k)s and IRAs. You can then make adjustments, such as for a health savings account (HSA) and other calculations that might change your AGI.

Here's a look at the taxes due on Social Security benefits for individuals and couples filing jointly.

• If your combined income is under $25,000 (single) or $32,000 (married filing jointly), your Social Security benefits are not taxed.
• For combined income between $25,000 and $34,000 (single) or between $32,000 and $44,000 (married filing jointly), up to 50% of your benefits might be taxed.
• For combined income above $34,000 (single) or above $44,000 (married filing jointly), up to 85% of your benefits might be taxed.

Suppose you and your spouse are retired. Your combined Social Security benefits are $35,000, and you take an IRA distribution of $35,000.

Half the Social Security benefits total $17,500, which you then add to the IRA distribution for a total of $52,500 in combined taxable income.

However, while this amount is above the threshold for being taxed at as much as 85% of the benefits, this does not necessarily mean you will pay at this level. This is the maximum.

You can use Worksheet 1 from the IRS to calculate your taxable benefits. But this is a complex area, and it's a good idea to seek the help of a tax expert or use tax software.

However, if you hadn't taken an IRA distribution, the Social Security benefits would have been tax-free.

How IRA withdrawals trigger Medicare surprises

Another issue with an IRA withdrawal is that it can push you into a higher Medicare Income-Related Monthly Adjustment Amount (IRMAA) bracket.

“This increases your Medicare premium,” said Marcus Holzberg, a certified financial planner™ at Holzberg Wealth Management. “Since Medicare is deducted from your Social Security check, this will inadvertently reduce your Social Security benefits.”

Traditional IRA withdrawals, including required minimum distributions (RMDs), count as taxable income, which raises your Modified Adjusted Gross Income (MAGI). That's important to understand because Medicare uses your MAGI from two years earlier to determine whether you owe an income-related monthly adjustment amount, or IRMAA, surcharge on top of your standard Part B and Part D premiums.

For example, IRMAA kicks in for singles with MAGI above $109,000, or $218,000 for married couples filing jointly, in 2026. Making a large IRA withdrawal in a given year can easily push you over these thresholds, triggering higher monthly premiums that apply for the entire following year. Even a $1 bracket change can add hundreds or thousands of dollars annually in surcharges, with couples possibly facing double the impact.

Generally, qualified Roth IRA withdrawals do not count toward your MAGI, which is one reason many retirees use Roth conversions in lower-income years to manage future IRMAAs.

Do IRA withdrawals count as income for Social Security?

Despite what you might have heard, the Social Security Administration doesn't count IRA distributions as earned income when determining Social Security payments. The same goes for pension payments, annuities or interests and dividends from savings and investments.

None of that will lower your monthly benefits, although it can cause a taxable event if your AGI increases as a result.

Required minimum distributions (RMDs)

To avoid taxes on your Social Security benefits, you can defer taking distributions from your IRA. The added benefit is that your money can grow over time.

But there is a limitation: required minimum distributions (RMDs). This is when you must make withdrawals from your traditional IRA or other pre-tax retirement accounts such as a Simple IRA, SEP IRA, 401(k) or 403(b). The amount is considered income for the taxes on your Social Security benefits.

RMDs are triggered based on your age — 73 if you were born between 1951 and 1959, jumping to 75 if you were born in 1960 or later. The amount of the withdrawal is based on an IRS calculation, which includes the account balance and your life expectancy. If you don't make the distribution, you'll be subject to paying income taxes and a 25% penalty.

One way to handle the impact of RMDs is by taking a qualified charitable distribution (QCD). “This allows you to use distributions from your IRA to contribute directly to qualified charities,” said Holzberg. “In doing this, the IRA distribution is not included in your income, thereby lowering your AGI.”

On the other hand, you can delay when you claim Social Security benefits. You can wait until age 70. For every year you delay receiving the benefits, your annual payment increases by about 8%.

Traditional vs Roth IRAs: Which one is better on your Social Security check?

When it comes to tapping into your retirement income, the type of IRA you have can affect how much of your Social Security benefits are subject to federal taxes.

Traditional IRAs let you deduct contributions upfront, but withdrawals count as ordinary taxable income. That extra income boosts your combined income — your adjusted gross income plus nontaxable interest, plus half your Social Security benefits — which can push you over the thresholds where up to 85% of your benefits get taxed federally.

Roth IRAs offer a clear advantage because contributions are made with after-tax dollars, and qualified withdrawals are tax-free and do not increase your adjusted gross income (AGI).

As a result, these distributions are excluded when calculating your combined income, so they don't affect whether your Social Security benefits are subject to federal income tax. That's a big advantage. This also helps prevent your benefits from being pushed into the 50% or 85% taxable range, avoiding any unexpected tax liability from those withdrawals.

IRAs and Social Security

At the end of the day, the way you manage your IRA can either protect or erode the after-tax value of your Social Security benefits. The key is planning rather than reacting later.

That might mean making Roth conversions during lower-income years, spacing out traditional withdrawals to stay below the tax threshold, or aligning distributions around RMDs. The small steps you take today can make a meaningful difference in how much you have on hand in retirement.

Tax rules and your personal circumstances can vary. Consult with a financial adviser or tax professional to run your specific numbers and maximize what you actually keep. That way, you can enjoy your retirement with fewer surprises.

Read More

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• Inherited an IRA? Key Distribution Rules to Know

For the past 20 years, a majority of Americans have saved and invested for retirement on their own because company pension plans are largely a thing of the past. Living on Social Security alone during retirement isn’t appealing for most of us, since the maximum benefit is around $46,000/year for 2024. But how much and where should we invest for retirement?

The short answer: Most people should be saving and investing about 15% of their annual income into a retirement savings/investment plan, such as an IRA or 401(k) or 403(b), or some combination.

Saving for retirement through your employer

Companies typically offer some form of retirement savings plan, with employee contributions coming directly out of their paychecks. Often, these are 401(k) or 403(b) plans but could also be 457 or deferred compensation plans, depending on the employer and type of business. Many, but not all, companies will match a specific percentage of their employees’ contributions. If you’re lucky enough to have this option, you should take advantage of it, because it’s free money.

Investment options for these types of retirement savings plans are generally selected by the employees from a pre-defined list of 15 to 50 mutual funds or similar options. The IRS does set annual contribution limits for the employee portion, which for 2024, was $23,000 for employees under age 50 and $30,500 for employees 50 or older.

Saving on your own

If you work for a small company or for yourself, as an independent contractor, you may not have a company-sponsored 401(k), 403(b) or 457 plan available. In this case, you could set up a Simplified Employee Pension, or SEP IRA, plan if you own your own business or work for yourself as a consultant or entrepreneur. Small companies sometimes do offer a SIMPLE IRA plan, which operates much like a 401(k) but has lower annual contribution limits and requires employers to match at a specific safe-harbor level.

If none of those is available, employees can contribute to their own individual retirement account, or IRA, set up directly with a brokerage firm or bank. IRAs come in two “flavors”: traditional IRAs and Roth IRAs. Their annual IRA contribution limits are even lower than the others mentioned — just $7,000 for those under 50 and $8,000 for those 50 and older. In addition, sometimes higher-income individuals may be prohibited from making contributions altogether (e.g., Roth IRA) or may lose the tax deduction (e.g., traditional IRA). On the plus side, investment options in IRAs are virtually unlimited, with most any stock, bond, ETF or mutual fund available.

Some major tax breaks

One key aspect of these retirement savings plans is their favorable tax treatment. For simplicity, there are two distinct tax advantages associated with these types of plans: (1) tax deduction of employee’s contribution or (2) tax-free withdrawals during retirement. However, each plan gets one or the other — but not both — tax advantages.

For example, most legacy 401(k) plans and traditional IRAs, along with SIMPLE and SEP IRAs, provide a tax deduction for employee contributions. But later, in retirement, all monies distributed from these plans are considered taxable income. The tax benefit comes on the front end, when contributions are made. Once a retiree turns 73 years old, required minimum distributions (RMDs) apply, necessitating withdrawals be taken according to an IRS table. These withdrawals are taxed as ordinary income.

In contrast, Roth IRAs do not provide a front-end tax benefit, meaning employee contributions to Roth IRAs are not deductible. But unlike traditional IRAs, Roth IRA distributions come out tax-free during retirement if the Roth account has been in place for five or more years, and the employee is 59½ years old or older. Roth IRA tax benefits are accrued on the back end, meaning they kick in during retirement, when distributions are taken to supplement Social Security income.

Today, many employer-sponsored retirement plans also allow employee 401(k) contributions to be designated as Roth. This is an excellent way to build up a large retirement account, which may be available tax-free in retirement. And because monies inside a Roth account have already been taxed, no RMDs are generally required.

Which is better: Traditional or Roth?

Both, actually! Using either or both retirement savings/investing vehicle is better than not saving/investing at all. And when it comes to saving for retirement, sooner is always better than later, and higher contributions are always better than lower.

If I were advising a 25-year-old employee just starting out and making $50,000 per year, I’d suggest building up their Roth 401(k) and/or Roth IRA as much as possible, because a tax deduction at that income level isn’t as critical at this juncture. But, if my client were 58 years old and making $650,000 annually, I’d suggest they use all the tax deductions they can get right now because they’re in a very high tax bracket already. This means using a traditional 401(k) or IRA for this client would be my suggestion.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

Here’s a tax-smart way for traditional IRA owners, aged 70½ or older, to give to charity: Make a qualified charitable distribution. 

For 2024, you can transfer up to $105,000 directly from your IRA to charity. For individuals with more than one IRA, the $105,000 cap applies per account owner, not per IRA. The amount next year will be a bit higher because of inflation indexing. Spouses who each have an IRA can do their own QCD. You can each give up to $105,000, provided each of you has substantial amounts in your traditional IRAs. There are three main tax benefits of QCDs. 

• First, they are not taxable to you 
• Second, they are not added to your adjusted gross income, which can help you mitigate surcharges on your 2026 monthly Medicare premiums. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers who don’t itemize because of higher standard deductions. But even if you do itemize on Schedule A, QCDs are a good tax strategy because the distributions don’t increase your AGI. 
• Third, QCDs can count toward your annual required minimum distributions, but be sure to do the QCD before taking your full RMD for the year for yourself. Note you can’t deduct the QCD as a charitable contribution on Schedule A.

There are a few other important QCD rules that you should be aware of: 

Only transfers of money from your IRA directly to charity qualify as QCDs. Most IRA custodians will require you to fill out a form requesting the charitable payout. The custodian will then either send a check directly to the charity or make a check payable to the charity and send it to you to mail. In either circumstance, get a receipt from the charity. If you happen to have check-writing privileges on your IRA account and want to write the check to the charity yourself, first ask the custodian if that’s OK. 

The QCD money must generally go to a Section 501(c)(3) organization. The SECURE 2.0 law provides a limited exception to this. IRA owners can do a one-time QCD of up to $53,000 through a charitable gift annuity, a charitable remainder unitrust or a charitable remainder annuity trust. 

You cannot do a QCD from a 401(k), 403(b) or other workplace retirement plan. You can only do a QCD from your IRA.

You must be at least 70½ on the QCD date. If you turn 70½ on Nov. 1, for example, you must wait until that day or later to make the transfer.

There’s a complex rule for people who make deductible IRA contributions after 70½. Essentially, these IRA contributions reduce your allowable tax-free QCD amount until they are used up. 

Here’s a simple example: A 74-year-old working woman wants to do a QCD for the first time in 2024. For 2020, 2021, 2022 and 2023, she made deductible contributions to her traditional IRA totaling $28,500. If the woman transfers $25,000 of IRA money to charity in 2024, the full $25,000 is taxable to her because it is less than the $28,500 of post-70½ deductible payins. Let’s say that in 2025, she then transfers $20,000 to charity directly from her IRA. $16,500 will be a nontaxable QCD, and $3,500 will be treated as a normal payout.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe. 

There’s been significant buzz recently focused on the expected transfer of approximately $72 trillion (yes, trillion with a T) of personal assets in the United States over coming years from baby boomers to younger generations. While this may seem to negate the need for pre-retirees to plan for their own retirements (spoiler alert — it doesn’t), it does highlight the significant role inherited IRAs play in wealth transfers between generations.

There are two types of inherited IRAs: traditional and Roth. An inherited traditional IRA is a tax-deferred investment account that is used as the vessel to receive assets coming from another tax-deferred investment account (e.g., traditional 401(k)s and traditional IRAs). By comparison, an inherited Roth IRA is an after-tax investment account used to receive assets from a Roth 401(k) or Roth IRA.

To help you decide how to handle being the owner of an inherited IRA, I’ve compiled three common questions I receive from my clients and my current guidance on the matter.

1. What are the current distribution rules and tax impacts for inherited traditional and Roth IRAs?

For traditional inherited IRAs:

• If the assets received have come directly from your deceased spouse, you can liquidate the IRA over your lifetime — a tax-minimizing strategy called a “stretch IRA.” You will only be on the hook to take annual required minimum distributions (RMDs), which will be treated as taxable income for you.
• However, in most cases, if the assets were received from anyone else (for example, a deceased parent), then you can no longer do a stretch IRA. Instead, you must liquidate the entire account within the next 10 years. (This unfortunate window was passed into law in 2019 under the SECURE Act, and it applies to inheritances received starting in 2020.) There are a few exceptions to the 10-year rule, including minor children (but not grandchildren) of the IRA owner, and people who are chronically ill or disabled. These folks can all still do a stretch IRA.

For inherited Roth IRAs:

• Basically, the same conditions above apply; however, any distributions taken are not taxed.

2. Is it true that annual RMDs are now required if I inherit a non-spousal IRA?

Technically, yes … but in reality, no — because the IRS waived the annual RMD requirements in 2021, 2022 and 2023 due to the confusion surrounding the issue. Let me explain:

The way the IRS interprets the SECURE Act, if you inherit an IRA from someone other than your spouse who had already begun taking RMDs themselves — and you aren’t among the exceptions listed above, such as someone who is chronically ill or disabled — then, yes, you must take annual distributions in each of the 10 years before the IRA must be fully liquidated. That news came as a surprise to many people who thought you could hold off on distributions until you had to clean the IRA out in year 10.

This uncertainty regarding whether annual RMDs are now required has caused a lot of confusion and let otherwise well-intentioned advisers decide for themselves. In 2023, the tax adviser of one of my longstanding clients declared early in the year that my client was required to take an RMD by the end of the year. After I recommended for months that she hold off doing so, the IRS finally declared that annual RMDs were, in fact, not required in 2023 but left the door open for RMDs to be required in future years.

You might be asking yourself if RMDs are now required in 2024. Thankfully, the IRS in April declared that annual RMDs are not required in 2024 for owners of a non-spousal inherited IRA. The IRS seems committed to offering future guidance on annual RMDs once a year, so we can likely expect another update sometime in 2025.

A reminder, though: Annual RMDs are required for IRAs inherited from a spouse. When those RMDs begin depends on whether the person chooses to be treated as a beneficiary of the inherited IRA or opts to be treated as its owner instead.

3. Can someone else inherit my inherited IRA?

This tends to surprise some people, but you can in fact designate beneficiaries for an IRA that you inherited. Those beneficiaries (either primary or contingent) can take over your inherited IRA upon your passing. This even applies in the case where you have inherited an IRA from a non-spouse and you pass away before the 10-year full liquidation period.

You should be sure to designate at least one beneficiary for each IRA you own — not only for inherited IRAs — especially if your intention is to leave IRA assets to people other than your spouse. Failure to declare at least one IRA beneficiary will likely result in your IRA passing to your spouse (if you’re married at the time of your death) or your estate (if you’re not married).

Designating a beneficiary is relatively straightforward and quick. Be sure to contact your IRA custodian to confirm their process.

Given the complex nature of inherited IRA enforcement, be sure to seek counsel from a trusted professional such as a Certified Financial Planner™ practitioner (aka a CFP® certificant) and/or a Certified Public Accountant (CPA) to help ensure you’re following the rules properly.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Individual retirement accounts represent an important part of the legacy many of us intend to pass on, but inheriting an IRA presents challenges that demand adequate planning and strategies. Notably, the SECURE Act and, more recently, SECURE 2.0 Act have ushered in sweeping changes to retirement and estate planning, especially for those inheriting retirement accounts.

Under the new rules, most IRAs inherited by non-spouse beneficiaries must be cleaned out within 10 years of the original owner's death. Previously, beneficiaries could "stretch" their distributions over their lifetimes, potentially lowering their tax obligations. This end to the "stretch IRA" strategy means you need a more calculated approach to managing any inherited funds.

Here are some key strategies for managing inherited IRA distributions under the new rules.

Use smart timing to make tax-efficient withdrawals

One of the primary considerations when managing inherited IRA distributions is minimizing your tax exposure. While the new rules require that the entire account be fully depleted by the end of the 10th year, you can withdraw money at various times over that period. Thus, beneficiaries can strategically time their distributions to take advantage of lower-income years, such as during a sabbatical or after a job loss.

By withdrawing larger amounts during these periods, beneficiaries can potentially reduce their overall tax burden. Additionally, during market downturns, beneficiaries can consider taking more substantial distributions, reinvesting outside the IRA at depressed prices, and potentially benefiting from future market recoveries.

Maximize growth of inherited Roth IRAs

For beneficiaries of inherited Roth IRAs, the focus shifts toward maximizing growth. While recipients are still required to pull all the money out by the end of the 10th year, it typically makes sense to let an inherited Roth IRA compound for as long as possible.

Beneficiaries who can afford to wait will be treated to 10 years of tax-free growth. Unlike traditional IRAs, Roth IRAs offer tax-free withdrawals if certain conditions are met. By leveraging the tax-free status of Roth IRAs, beneficiaries can maximize the growth potential of their inherited funds.

Enjoy the benefits of the stretch IRA — if you’re eligible

Some beneficiaries, however, continue to be eligible for the old “stretch IRA” beneficiary rules and can gradually withdraw money from their inherited IRA account over their lifetimes. This group is called Eligible Designated Beneficiaries, and calculating the required distributions over their life expectancy may result in more tax-deferred growth, less taxes paid overall and more money in the hands of your beneficiaries.

A list of Eligible Designated Beneficiaries who can still do a stretch IRA after the SECURE Act is as follows:

Surviving spouses. Any marriage, whether heterosexual or same-sex, would qualify as long as a marriage license was issued and the marriage is legal in the state where it was performed.

Disabled individuals. The SECURE Act uses a stringent definition of disability. Basically, any person who is partially disabled or is able to be gainfully employed in any type of employment would most likely not qualify.

A chronically ill person. A person is considered "chronically ill" if they are unable to perform at least two of the six activities of daily living (ADLs) for a period of at least 90 days. Also, their condition must be expected to last indefinitely. The activities of daily living are toileting, eating, transferring, bathing, dressing and continence.

Minor children. It must be emphasized that this specification applies only to the decedent's minor children. It does not apply to other relatives, including grandchildren. Also, the decedent's minor children can only utilize the stretch provision until they reach the age of the majority, which is 21, according to SECURE 2.0 Act. At that point, the stretch provision ceases and reverts back to the "10-year" rule.

For example, Tim is 50 and has a minor daughter, who is 11. Tim passes away unexpectedly and leaves all of his IRA to his daughter. She is able to use the stretch IRA rules from age 11 to 21, distributing a little from the IRA each year based on her life expectancy. Once she reaches 21, the 10-year rule will apply, and she must deplete all remaining assets in the inherited IRA account by the end of year 10.

Individuals not more than 10 years younger than the decedent. This group, in particular, may offer some unique planning opportunities. For example, one may decide to leave money to a trustworthy sibling or even their parents instead of their children or grandchildren. The parent or sibling could then be instructed to gift the distributions to the decedent's children or grandchildren.

This may result in less taxes paid and the ability to allow the assets to grow in a tax-deferred manner for a longer period of time. Implementing a strategy like this is complex and should be coordinated with a competent financial adviser and tax professional to consider gift tax, income tax and other tax-related implications.

Coordinate among multiple beneficiaries

When an IRA is inherited by multiple beneficiaries, it's imperative to synchronize withdrawal strategies to serve both collective and individual financial objectives effectively. This collaborative effort entails open dialogue among beneficiaries to harmonize their diverse financial aspirations with the overarching estate strategy.

Stay informed

As legislation continues to evolve, beneficiaries should stay informed about any future changes that may affect retirement and estate planning. Proactively monitoring legislative developments and staying aware of regulatory changes can help beneficiaries adapt their distribution strategies accordingly.

Managing inherited IRA distributions requires careful consideration and planning. With the changes introduced by the SECURE Act and SECURE 2.0 Act, beneficiaries must adopt a more calculated approach to optimize tax efficiency and align distributions with their individual financial goals. By implementing these strategies and leveraging the expertise of professionals, beneficiaries can navigate the complexities of inherited IRA distributions and maximize the benefits of their inherited accounts.

Investment advisory services offered through Osaic Advisory Services, LLC (Osaic Advisory), a registered investment advisor.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As traditional pension plans have largely disappeared over the years, many Baby Boomers heading into retirement today will by relying on cash balance pension plans instead. Understanding how to make the most of this employer benefit becomes increasingly important as one nears retirement.

Cash balance pension plans became popular in the late 1980s and early 1990s, especially with companies such as IBM, Xerox and AT&T, which at the time had large liabilities in their traditional defined benefit pensions. Cash balance pension plans emerged as a hybrid between traditional defined benefit plans (aka, a pension) and defined contribution plans (such as a 401(k) plan), offering employees a portable retirement benefit. The plans gained popularity among employers seeking to manage their costs and risks, while providing competitive retirement benefits.

Individuals with a cash balance pension plan face numerous decisions as they near retirement. Understanding the various options available is crucial for maximizing retirement income and ensuring financial security.

Let’s review the considerations and choices one should explore when navigating their cash balance pension options.

The basics

Unlike traditional defined benefit pensions, which provide a specific monthly benefit upon retirement, a cash balance pension maintains a hypothetical account balance that grows based on company contributions and interest credits. Unlike a 401(k), the employee can’t select a menu of investment options from which to invest their balance. The company determines the cash balance plan’s crediting rate, sometimes quarterly, but most often set annually. Here are a few companies’ cash balance pension plans’ crediting rates for 2024:

• GlaxoSmithKline: 3%
• Duke Energy: 4.46%
• IBM: 5%

Upon retirement or separation from service, employees typically have several distribution options.

Option 1: A lump sum payment in cash.

Cash balance participants may consider taking a lump sum payment from their cash balance pension. However, the entire payment is taxed as ordinary income, which can be very costly. Participants should carefully weigh the tax implications associated with a lump sum distribution.

Option 2: An IRA rollover.

Participants can roll over their cash balance pension to an IRA. A direct rollover to a qualified retirement account is not taxable — but any withdrawals you take later on will be taxed. An IRA rollover offers a couple of major advantages: It provides the participant with greater investment options, and it allows for more flexible income tax planning.

Keep in mind that if you leave a company before retirement, some companies don’t allow a rollover until the participant reaches a specified age. In addition, some employers require those with small cash balance pension benefits (say under $10,000) to exit the plan — either in lump sum or IRA rollover — when separating from service.

Option 3: Annuity payments.

Another option is to convert the cash balance pension into a series of annuity payments. Annuities provide a steady stream of income over a specified period, offering retirees a predictable source of retirement income. Retirees should compare different annuity providers and payment options to find the most suitable arrangement for their financial needs and goals.

Participants can also opt for some combination of these different options. For example, a participant might decide to take annuity payments for 50% of their cash balance pension and do an IRA rollover with the other 50%.

Other considerations

As interest rates have risen, the crediting rates of some cash balance pension plans are lower than CD rates, making the rollover option more attractive. Participants should also remember that cash balance pension plans are subject to the same required distribution rules as IRAs.

Cash balance pension plans are an often-overlooked component of one’s retirement nest egg. Navigating retirement options with a cash balance pension requires careful consideration and planning. By understanding the available options, evaluating individual goals and managing cash balance pensions in concert with 401(k) and Social Security benefits, retirees can pave the way for a secure and fulfilling retirement journey.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.