The Tax Benefits of Contributing to a Retirement Account

Saving for retirement is one of the most important financial decisions you can make—and the tax code rewards you for doing it. Whether you’re just starting out or nearing retirement, contributing to a retirement account can offer powerful tax benefits that enhance your long-term financial health.

Here’s a breakdown of how these accounts can work in your favor.

1. Tax-Deferred Growth
Traditional retirement accounts such as 401(k)s, 403(b)s, and Traditional IRAs grow on a tax-deferred basis. That means any interest, dividends, or capital gains within the account aren’t taxed annually. Instead, you pay taxes only when you begin withdrawing funds—typically in retirement.

This allows your investments to compound more efficiently over time, since you’re not losing a portion to taxes each year.

2. Tax-Deductible Contributions
Contributions to Traditional IRAs and employer-sponsored plans like 401(k)s or 403(b)s may be tax-deductible, reducing your current-year taxable income.

For 2025, the annual contribution limits are:

401(k), 403(b), most 457 plans: Up to $23,000, plus an additional $7,500 in catch-up contributions if you’re age 50 or older

Traditional IRA: Up to $7,000, with a $1,000 catch-up contribution for those 50 or older

Keep in mind that IRA deductibility may be limited based on income and participation in a workplace retirement plan.

3. Tax-Free Withdrawals with Roth Accounts
Roth IRAs and Roth 401(k)s flip the traditional tax treatment: you contribute after-tax dollars, but qualified withdrawals are tax-free.

This can be especially advantageous if you expect to be in a higher tax bracket in retirement, or if you want flexibility in managing your taxable income later in life.

To qualify for tax-free withdrawals, the account must be open for at least five years and the withdrawal must occur after age 59½ (or due to death, disability, or a first-time home purchase, in the case of Roth IRAs).

4. Potential for Lower Tax Rates in Retirement
Withdrawals from traditional retirement accounts are taxed as ordinary income. However, many people find themselves in a lower tax bracket in retirement, especially if they’ve planned well and spread out their income sources.

This timing strategy—deferring income to years when your rate is lower—can help reduce lifetime taxes paid.

5. Catch-Up Contributions for Savers Age 50+
If you’re 50 or older, the IRS lets you contribute more to help you accelerate your retirement savings. In 2025:

You can add an extra $7,500 to your 401(k), or

An extra $1,000 to your IRA

These contributions reduce your taxable income further, providing a dual benefit of increased savings and lower tax liability.

6. Employer Contributions Are Not Taxed as Income
Many employer-sponsored retirement plans offer matching contributions or profit-sharing. These amounts are not included in your taxable income at the time they’re made. Instead, they grow tax-deferred alongside your own contributions.

If your employer offers a match, contribute enough to capture the full benefit—it’s essentially free money and part of your compensation.

Final Thoughts from Jennifer
Contributing to a retirement account is about more than just preparing for your future—it’s one of the most tax-efficient ways to grow your wealth. With a smart strategy tailored to your income, age, and financial goals, you can reduce your current tax bill while building a secure retirement.

If you’re unsure where to start or how much to contribute, we’re here to help. At Walker Total Financial, we can walk you through the options and help you make the most of today’s tax rules.