Retirement Account Tax Strategies

Retirement accounts are among the most powerful tax planning tools available. Understanding the differences between traditional and Roth accounts, current contribution limits, conversion strategies, and required minimum distribution rules is essential for the CFP exam and effective client planning.

Traditional vs. Roth: The Fundamental Choice

The core decision in retirement account planning is whether to pay taxes now (Roth) or later (Traditional):

When Traditional Makes Sense

• Currently in a high tax bracket (32%+)
• Expect to be in a lower bracket in retirement
• Need the current tax deduction for cash flow
• State has high income tax now, may retire to low/no tax state

When Roth Makes Sense

• Currently in a lower tax bracket (10%-22%)
• Expect same or higher bracket in retirement
• Have a long time horizon for tax-free growth
• Want to minimize RMDs and leave tax-free inheritance
• Anticipate future tax rate increases

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2025 Contribution Limits

Employer-Sponsored Plans (401(k), 403(b), 457)

SECURE 2.0 Super Catch-Up: Beginning in 2025, participants ages 60-63 can make enhanced catch-up contributions of $11,250 (the greater of $10,000 or 150% of the regular catch-up limit). Once a participant turns 64, they revert to the standard $7,500 catch-up.

High Earner Roth Requirement (2026): Starting in 2026, employees earning over $145,000 in FICA wages must make catch-up contributions on a Roth (after-tax) basis only.

Individual Retirement Accounts (IRAs)

Roth IRA Income Limits (2025)

Traditional IRA Deduction Limits (2025)

If covered by a workplace retirement plan:

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Roth Conversion Strategies

A Roth conversion moves funds from a traditional IRA or qualified plan to a Roth IRA. The converted amount is included in taxable income for the year.

When to Convert

Ideal conversion windows:

1. Low-income years - Sabbatical, between jobs, early retirement before Social Security/RMDs
2. Fill up lower brackets - Convert enough to "top off" your current bracket without pushing into a higher one
3. Before RMDs begin - Convert during the "gap years" between retirement and age 73
4. Market downturns - Convert depressed assets; pay tax on lower value, enjoy tax-free recovery
5. Expecting higher future rates - Lock in current rates if you believe rates will increase

Conversion Considerations

Key Rules:

• No income limits on who can convert (limits were eliminated in 2010)
• No limit on conversion amount
• Conversions are irrevocable (cannot be "recharacterized" back)
• Must be completed by December 31 of the tax year

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Backdoor Roth Strategies

Backdoor Roth IRA

For high earners whose income exceeds Roth IRA contribution limits:

Process:

1. Contribute to a non-deductible traditional IRA ($7,000 / $8,000 for 2025)
2. Convert the traditional IRA to Roth IRA (ideally immediately to minimize taxable gains)
3. Report on Form 8606

Pro Rata Rule Warning: If you have other pre-tax IRA balances (traditional, SEP, SIMPLE), the conversion is taxed proportionally across ALL IRA assets, not just the non-deductible contribution. This can create unexpected taxes.

Solution: Roll pre-tax IRA funds into a 401(k) before performing backdoor Roth conversion.

Mega Backdoor Roth

For maximizing Roth contributions beyond normal limits using a 401(k):

Requirements:

• 401(k) plan must allow after-tax contributions
• Plan must permit in-service withdrawals or in-plan Roth conversions

2025 Opportunity:

• Total 401(k) contribution limit: $70,000 (under 50)
• After maxing $23,500 employee deferral + employer match, the remaining "space" can be contributed as after-tax
• Example: $23,500 deferral + $15,000 employer match = $38,500. Remaining $31,500 can be after-tax contributions, then converted to Roth

Potential additional Roth savings: Up to $46,500+ per year beyond normal limits

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Required Minimum Distributions (RMDs)

SECURE 2.0 RMD Ages

RMD Calculation

RMD = Account Balance (Dec 31 prior year) / Life Expectancy Factor (from IRS Uniform Lifetime Table)

Example: Age 75, account balance $500,000, life expectancy factor 24.6 RMD = $500,000 / 24.6 = $20,325

Key RMD Rules

Roth Account RMD Exemptions

• Roth IRAs: No RMDs during owner's lifetime
• Roth 401(k)/403(b): Exempt from RMDs as of 2024 (SECURE 2.0 change)
• Inherited Roth IRAs: Subject to RMD rules for beneficiaries

QCD Strategy (Qualified Charitable Distribution)

Taxpayers age 70.5+ can transfer up to $108,000 (2025) directly from an IRA to a qualified charity. The QCD:

• Counts toward RMD requirement
• Is excluded from gross income
• Cannot be used with a charitable deduction (no double benefit)

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Tax Planning Integration

Effective retirement account tax planning combines multiple strategies:

1. Maximize employer match first - "Free money" before other contributions
2. Evaluate Traditional vs. Roth based on current and expected future rates
3. Use Roth for young, low-income earners - Maximize tax-free compounding
4. Convert strategically during low-income windows
5. Plan for RMDs - Consider Roth conversions before age 73/75 to reduce future RMDs
6. Coordinate with Social Security - Roth withdrawals don't increase taxable Social Security
7. Consider state taxes - Some states exempt retirement income but tax conversions