Saving for retirement: What does retirement look like to you?

The definition of retirement has changed dramatically in recent years. Once considered a major life event—the end of a person’s working career—retirement is now a process that opens the door to a new chapter and your next phase in life. Whatever retirement looks like to you, turning your vision into reality requires careful planning. The sooner you start, the better your chances of reaching your goals.

Choose a path that leads to your goals

Before you decide how to invest, ask yourself why you are investing. What is your objective? If your goal is to leave the workplace behind when you retire, you might follow a traditional path. Making tax-free contributions to your company’s 401k plan or an Individual Retirement Account (IRA) can reduce your income tax bill and provide tax-advantaged income later in life. Since you’ll be earning less in retirement, and in a lower tax bracket, the money you withdraw will be taxed at a lower rate.

If you  expect to be in a higher tax bracket in retirement, a Roth 401k or Roth IRA might be more appropriate. Contributions are made after the money has been taxed, so can be withdrawn at any time, for any reason. After you’ve held the account for five years and reached the age of 59½, any earnings can also be withdrawn tax free.

Maximizing your retirement savings

Taking advantage of all your retirement investment options can help you make the most of your savings. As an example, the following steps may maximize your savings potential if you are in a low tax bracket and expect to be in a higher bracket in the future. Please seek guidance from your tax advisor to determine the best approach for your individual situation.

1. Join your company’s 401k plan

Since they were first introduced in the 1970s, company-sponsored 401k plans have grown to become one of the most popular and tax-efficient ways to save for retirement—and for good reason. Whether you choose a traditional or Roth 401k, the benefits they offer can be compelling.

One of the most attractive features of a 401k plan is that most employers match your contributions, often dollar for dollar up, to a certain point. There are no income limitations on participating in a traditional or Roth 401k. Most companies offer two types of vehicles:

• Traditional 401ks are tax-deferred retirement plans. Taxes are postponed, or deferred, until you retire and start taking withdrawals, likely at a lower tax rate. In the meantime, most workers can make pre-tax contributions of up to $23,500 annually ($31,000 if you are over 50), reducing your income tax bill at the end of the year and growing your retirement savings without paying taxes on any growth in the account. You can start withdrawing the money at age 59½ and it will be taxed as income. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.

Might be appropriate if you…
-Have limited disposable income
-Are saving for more immediate needs, such as buying your first home
 

• Roth 401k contributions are made after the money has been taxed and can be withdrawn tax free without penalties at any time. But you’ll have to own the account for at least five years and reach the age of 59½ before you can withdraw any appreciation in the account without paying taxes or penalties.

Other features are generally the same for a Roth 401k and traditional 401k, including your contribution limits, your employer’s matching contribution and your minimum distribution requirements after age 73.

Might be appropriate if you…
-Want more flexibility, including the ability to make tax-free withdrawals after five years
-Expect to be in a higher tax bracket when you retire
-Are planning to leave your retirement assets to your heirs (you’ll have to roll your Roth 401k into a Roth IRA)

2. Set up an IRA

After you’ve joined your company’s 401k plan and are contributing as much money as your company will match, consider funding a traditional or Roth IRA, depending on your objectives.

Traditional and Roth IRAs offer many of the same features as their 401k counterparts, with several important distinctions. Most notably, they are offered by banks, brokerage firms and other financial institutions, not your employer. So you won’t receive a matching contribution.

• Traditional IRAs are usually most attractive if you expect to be in a lower tax bracket when you retire. The contributions you make today are tax deductible, within certain limits based on your income and  access to an employer-sponsored plan, so they may reduce your income tax bill. The money you contribute, along with any appreciation earned in the account over the years, is taxed as ordinary income when you start taking distributions, which are allowed without penalties after the age of 59½.

Might be appropriate if you…
-Have limited disposable income
-Are saving for more immediate needs, such as buying your first home

• Roth IRA contributions are made after the money has been taxed. Therefore, the money you contribute can be withdrawn at any time tax free. Any appreciation can be withdrawn without taxes or penalties after you have held the account for five years and reached the age of 59½.

Might be appropriate if you…
-Expect to be in a higher tax bracket when you retire
-Want the flexibility to make early withdrawals
-Plan to leave retirement assets to your heirs

Keep mind, however, that you may not be eligible for a Roth IRA if your income exceeds certain limits. In that case, consider a traditional IRA. Some or all of the money you contribute could be tax-deductible. You might also reconsider your company-sponsored Roth 401k, which has no income limitations.

3. Max out your 401k and IRA contributions

By this point, you should be taking full advantage of any matching contributions your company makes to your 401k account and contributing the maximum tax-deductible amount to your traditional IRA. If you still have money to save for retirement, revisit those accounts and boost your contributions.

Increase your 401k contributions to the maximum allowable amount, above and beyond the company match. Within certain limits, contributions to a traditional 401k will be tax deductible, your savings will grow tax free and withdrawals in retirement will be taxed as ordinary income. Boosting your contributions to a Roth 401k beyond the company match also offers the opportunity for tax-free growth in an account that offers tax-free retirement income.

4. Make after-tax IRA contributions

If you are already contributing the maximum tax-deductible amount to your traditional IRA, the next step is to make non-deductible contributions, up to your maximum allowable limit. While they  won’t reduce your income tax bill, after-tax contributions to a traditional IRA will supplement your retirement savings and keep you moving in the right direction. For qualified distributions, only the appreciation in your account from those after-tax contributions will be taxed as ordinary income.

The term “non-deductible IRA” is a bit misleading. It actually refers to traditional IRAs used by investors who cannot make tax-deductible contributions, usually because their income exceeds the limits. This approach is considered a last resort for retirement savers who have exhausted all other options. But if you fall into this category, opening a traditional IRA and funding it with after-tax dollars still offers benefits: your savings will grow without capital gains or dividend taxes, and when you start taking distributions you’ll pay income taxes only on the appreciation, not your contributions.

Thanks to a popular loophole in IRS regulations, it is also possible to convert your traditional IRA to a Roth IRA, sometimes just days after opening it. This “back door” approach allows you to essentially open a Roth IRA without any income restrictions. Growth and qualified distributions are tax free.