If your retirement goal is the same as mine — to do so as soon as possible! — then you need to add as much to your tax-favored retirement plans now. There’s a Dec. 31 deadline for some contributions.
Long-time readers of the ol’ blog know that I’m a big fan of retirement. Yep, that’s my sticky note above advocating early-as-possible retirement.
I’m almost there, thanks in large part to tax-favored savings that the hubby and I regularly contributed to during our prime working years.
So that you, too, can retire on your schedule and with the post-work lifestyle you want, today’s December Tax Move is to max out your retirement plans.
Many tax-advantaged savings options: The Internal Revenue Code offers a variety of ways to save on taxes while stashing retirement money.
Many workplaces offer defined contribution plans, generally known as 401(k) accounts. Here, workers put in money each pay period and their employers match up to a certain percentage.
Most are traditional 401(k)s, meaning the taxes due on the plans’ balances are deferred until withdrawn, either voluntarily or as required minimum distributions (RMDs). Some companies, however, offer Roth 401(k)s, into which already taxed dollars are added and distributions are tax (and RMD) free.
You also can open an IRA. These also come as either traditional tax-deferred accounts, or Roth IRAs that don’t have tax implications upon withdrawal.
401(k) time and contribution limits: IRAs and 401(k)s do, however, share one thing. There are annual limits on how much you can put into the plans and when you can do so.
You have until next year’s Tax Day, which is April 15, 2026, to contribute to a traditional or Roth IRA. But if you want to max out your workplace plan, you must do so by Dec. 31.
For 2025, employees can stash away $23,500 in a 401(k) by the end of the year.
Those age 50 to 59 or 64 or older can put in that amount plus a catch-up contribution of $7,500. That brings these older workers’ maximum 401(k) contribution this year to $31,000.
But wait. There’s more. Workers age 60 to 63 in 2025 can make a so-called super catch-up contribution, created as part of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022. That added amount is $11,250, which allows them to put in a total of $34,750 in their workplace retirement plan this year.
If you haven’t reached the max in your 401(k), consider increasing your contributions before the end of the year. I know, most of us, regardless of age, don’t have enough wiggle room in our budget to contribute the maximum amounts. But if you can put in any additional money now, the power of compounding will help make your golden years shine.
Just contact your human-resources department or plan administrator to put through the paperwork adjusting your paycheck contributions for the balance of the year.
IRA deadline and amount maximums: IRAs, as noted earlier, give you a bit more contribution leeway as far as timing. Instead of Dec. 31, you have until the next year’s filing deadline to put in an amount and have it count toward the previous tax year.
Again, that’s April 15, 2026.
But the sooner you put money into the account, the sooner it starts earning, either tax-deferred in a traditional retirement arrangement or tax-free if you have a Roth IRA.
As for IRA contribution limits, the 2025 maximum is $7,000. That’s for both traditional and Roth versions.
There also is a $1,000 catch-up contribution available to IRA owners age 50 or older.
Converting a traditional IRA: You also might want to look into converting your traditional IRA to a Roth account.
You’ll owe tax on any traditional amount you shift to a Roth, but the new IRA’s future earnings are tax-free.
But a traditional-to-Roth conversion isn’t a move to be made without due consideration.
Since IRA distributions are taxed at ordinary income tax rates, you’ll first want to look at what yours is for 2025. You can find it, and 2026 brackets, in this table.
If you expect your retirement tax rate will be the same or higher than what you’ll owe on converting to a Roth IRA, then switching to a Roth can pay off taxwise.
That, of course, presumes you won’t have to use any of your IRA funds to pay your conversion tax bill. If you do use IRA money to pay taxes, you immediately reduce the value of your account the conversion potential.
If, however, your income tax rate in retirement will be lower, tax-free Roth payouts are less advantageous.
Medicare (and other tax) implications: Older IRA owners also need to be aware of a potential Roth conversion’s effect on Medicare premiums.
If you’re already receiving Uncle Sam’s retiree medical coverage, or will in a couple of years, the taxable income from the traditional IRA conversion will increase your modified adjusted gross income (MAGI). And that increase could trigger an income-related monthly adjustment amount, or IRMAA, surcharge.
IRMAA’s added cost to monthly Medicare Part B and Part D premiums is based on your annual income two year prior. So, 2025 amounts will affect 2027 Medicare premiums.
Even if Medicare costs aren’t an immediate concern, the added taxable conversion income could cause other tax complications. A higher adjusted gross income or MAGI could cause you to lose tax deductions and credits you had planned to claim.
Partial conversions might be preferable: If you’re leaning toward a Roth conversion, but don’t have enough to pay the full tax bill, consider a partial conversion.
There’s no tax law requiring you convert your full traditional IRA all at once. You can move the tax-deferred funds to a tax-free Roth in increments over several years, spreading out the conversion tax costs.
Finally, note that you no longer can undo a Roth conversion.
Such a recharacterization was allowed before 2018, letting you transfer the converted Roth funds back to your traditional IRA and erasing the tax bill. Now, however, once you convert your traditional IRA to a Roth, in whole or part, you are stuck with the new account and its tax bill.
