Don’t Miss Out on Tax-Advantaged Retirement Savings Opportunities

Saving for retirement is important. At the same time, nobody wants to pay more than their fair share in taxes. Fortunately, there are several tax-advantaged retirement accounts available.

Refresh your knowledge of accounts designed to incentivize saving for retirement while potentially reducing tax consequences.

Are Retirement Accounts Tax-Free?

Retirement accounts often come with tax benefits but are not completely free from taxes. They do have tax advantages, however, and are usually broken down into two main categories:

• Tax-exempt accounts. Qualified withdrawals from tax-exempt accounts are not subject to tax. Contributions are taxed. Examples include Roth IRAs and Roth 401(k)/403(b) plans, explained later in this article.

• Tax-deferred accounts. Initial contributions aren’t taxed, and withdrawals are taxed at your income tax rate. Examples include traditional IRAs and employer-sponsored retirement plans such as 401(k)s and, 403(b)s, also detailed in this article.

Types of Tax-Advantaged Retirement Accounts

Depending on your employment status, you could have more than one type of retirement account.

Employer-Sponsored 401(k)s or 403(b)s

Larger businesses and corporations often offer their employees access to 401(k) plans, a type of retirement savings plan named for the part of the IRS code that established it. Nonprofit employers, schools and governments may offer a similar account called a 403(b). What’s more, many employers match all or part of employee contributions, giving an extra boost for retirement.

Employee contributions to a 401(k) or a 403(b) are made pretax, so they can lower taxable income now. The annual contribution limit is $23,500 for 2025. If permitted by the plan, participants age 50 and over at the end of the calendar year also may be able to make catch-up contributions up to $7,500 in 2025.

When money is withdrawn in retirement, it’s taxed as ordinary income. However, penalties may also apply if money is withdrawn before reaching age 59½. In some cases, participants in a plan may be able to borrow from a 401(k) or 403(b), but they’d need to pay back that money with interest, usually within five years. Other rules and restrictions may apply.

Roth option: Some employers offer Roth 401(k) and Roth 403(b) features in their retirement plans. That means the accounts are funded with after-tax dollars, and the contributions do not reduce your taxable income. Additionally, they offer tax-free withdrawals if the account is at least five years old and you are at least age 59½. Explore Roth 401(k) and Roth 403(b) benefits.

Traditional IRAs and Roth IRAs

Savers may be able to contribute to an individual retirement account (IRA) even if they have a retirement savings plan through work. You’ll want to check the IRS’ eligibility requirements and contribution limits that are set each year.

For 2025, savers may be able to contribute up to a total of $7,000 in a Roth IRA and/or traditional IRA if the saver or spouse has earned income. Those over age 50 may also be able to contribute an extra $1,000 per year.

However, these accounts are taxed differently after age 59½:

• With Roth IRAs, contributions are taxed when that money is earned. No additional taxes are imposed when the funds are withdrawn in retirement, including the gains earned on the contributions—provided the distribution is a qualified distribution.

• Unlike traditional IRAs, Roth IRAs generally do not include required minimum distributions by age 72.

• Contributions to traditional IRAs are not taxed when they flow into the account. Thus, they may reduce current taxable income if the saver does not exceed the IRS’ defined income limits.

• Withdrawals are subject to taxes, including the gains on the contributions. Generally, early withdrawals are subject to your gross income tax rate plus a 10% tax penalty (check with the IRS for exceptions ).

SEP IRAs

A simplified employee pension (SEP) is a retirement savings option available to any person running a business, including solopreneurs. The employer sets up a SEP IRA for each eligible employee, and only the employer contributes to it, following IRS rules.

For 2025, the contribution limit is 25% of the employee’s compensation, up to $70,000. SEP contributions are tax deductible for the employer and are excluded from employees’ gross income. (Contributions are not subject to federal income tax withholding, Social Security, Medicare and federal unemployment taxes.)

The employee is always 100% vested in (or has ownership of) all SEP IRA money—but withdrawals are taxable income and may be subject to a 10% additional tax if taken before age 59½.

SIMPLE IRAs and SIMPLE 401(k)s

Savings Incentive Match Plan for Employees (SIMPLE) IRAs and SIMPLE 401(k)s give employers with 100 or fewer employees a way to contribute toward their employees’ and their own retirement savings. For both types of plans, employees can choose to contribute from their salaries. However, the employer must contribute to each employee’s plan even if the employee doesn’t.

For 2025, employees can contribute up to $16,500* from their salaries to a SIMPLE IRA or a SIMPLE 401(k). Beginning at age 50, you also may be able to make a catch-up contribution, up to $5,250 in 2025.

SIMPLE IRA AND SIMPLE 401(k) contributions are made with pretax money, so contributions and earnings are taxed when they’re withdrawn. However, some SIMPLE IRA plans now offer Roth options with after-tax contributions and tax-free withdrawals in retirement. SIMPLE 401(k) plans do not have Roth options.

Got Taxable Accounts? Consider Tax-Efficient Investments Like ETFs

In some cases, you still might choose to invest in a taxable investment account. You won’t have the tax benefits of a 401(k) or other tax-advantaged retirement savings account, but you won’t face penalties if you need to withdraw money before retirement age.

Exchange-traded funds (ETFs) are one option to consider in a taxable investment account because they have distinguishing features that may make them more tax efficient than mutual funds.

Take Advantage of the Tax Savings

It’s possible that more than one account could fit your situation. Using this “cheat sheet” of tax-advantaged retirement accounts can help you find opportunities to save for retirement in a tax-savvy way.