How Retirement Accounts Are Taxed in the USA
As we step into our 40s, a common question arises: are we on track for retirement? While many of us estimate how much we will need and work toward that goal, one crucial aspect we often overlook is taxes. In this article, we will explore different types of retirement accounts and how they are taxed during retirement.
Let's review different types of accounts.
- Tax deferred
- Employer 401k/403b/Annuities
- Traditional IRA
- After Tax
- Roth IRA
- Tax Advantage
- Health Savings account (HSA)
Tax Deferred - Employer 401k/403b/Annuities
Though it is not mandatory, 401(k) plans are a common retirement benefit offered by many employers in the United States. Contributions to a 401(k) are tax deductible. These contributions reduce your taxable income and lower your tax liability. As of 2025, for individuals under 50 years of age, the contribution limit is $23,500. Taxes are paid when you withdraw the money from the account during retirement.
In addition to employee contributions, it is common for employers to match a portion of the employee’s 401(k) contributions. Two common matching arrangements are:
- Matching 50 percent of all employee contributions
- Matching 50 percent of contributions up to 6 percent of salary
You should contribute enough to receive the full employer match. Think of the employer contribution as an immediate return on your investment. In the first example, contribute as much as possible to maximize your return. In the second, contribute at least 6 percent to get the full employer match.
Tax Deferred - Traditional IRA
Contributions to a Traditional IRA are tax deductible based on your income level. If you are married and filing jointly, the income limit for 2025 is $146,000. If your employer does not offer a 401(k), the limit increases to $246,000.
If your income exceeds these limits, contributions to a Traditional IRA are not tax deductible. You can still contribute, but you will not receive a tax benefit. When you pay taxes now on the contributions, you will only pay taxes on the earnings portion during retirement.
If your employer does not offer a 401(k), a Traditional IRA is a good alternative. It also provides more investment options than most employer 401(k) plans. If you prefer specific investment choices or want more flexibility, a Traditional IRA can be a good fit.
After Tax - Roth IRA
Contributions to a Roth IRA are made with post-tax money, meaning you pay taxes now, but your earnings grow tax free. You will not pay taxes when you withdraw funds during retirement. As of 2025, the contribution limit for individuals under 50 years old is $7,000. Individuals aged 50 and older can contribute up to $8,000.
There is also an income limit that determines eligibility to contribute. For those married and filing jointly, the income phase-out begins at $236,000 and ends at $246,000. Above that limit, you cannot contribute directly to a Roth IRA.
There is one key difference between Traditional and Roth IRAs. You can contribute to a Traditional IRA even if your income exceeds the limit, though without tax benefits. For a Roth IRA, however, you cannot contribute at all if your income exceeds the limit. There are ways to work around this, such as the Backdoor and Mega Backdoor Roth strategy, which I will cover in another short article.
Tax Advantage - Health Savings account (HSA)
An HSA is available to those with a high deductible health insurance plan. If your health insurance is through your employer, your employer may also contribute to your HSA. The contribution limit for families in 2025 is $8,550, and for individuals, it is $4,300.
Your contributions are made with pre-tax dollars, which lowers your taxable income. Withdrawals are tax free when used for qualified medical expenses.
Some HSA providers allow you to invest your HSA balance in mutual funds, stocks, bonds, or exchange-traded funds (ETFs). If you can afford to pay medical expenses out of pocket now, let your HSA funds remain invested and grow over time. During retirement, you can withdraw money tax free not only for current medical expenses but also for any qualified medical expenses that occurred after you opened the HSA account.
That's a wrap for this week. Happy learning!
