Retirement and Taxes

Taylor Miller

Two Ways to Save

A 401(k) is a retirement plan that allows you to take money from your paycheck and save it before it’s taxed—or, if you prefer, after it’s taxed.

When you contribute pre-tax, the money goes into your 401(k) without being taxed. Then, when you retire and take that money out, that’s when it gets taxed. The idea is, hopefully, you’ll be in a lower tax bracket at that point.

If you choose Roth contributions, the money is taxed now—while you’re working—and goes into your 401(k) after taxes. Then when you retire and withdraw the money, it’s tax-free.

A lot of people choose pre-tax contributions to defer their taxes to a time when they expect to earn less.

For example, let’s say you earn $100,000 a year and contribute $20,000 to your 401(k). That means only $80,000 is considered taxable income for the year. Not too shabby!

Contribution Limits for 2025

Now here’s the part a lot of people miss: there are limits to how much you can contribute to your 401(k). For 2025, those limits are:

$23,500: Standard contribution limit (pre-tax or Roth)
+$7,500: If you’re age 50–59
+$11,250: If you’re 60–63
Back to +$7,500: If you’re over 64

These extra amounts are called “catch-up contributions”—a chance to stash away a bit more as you get closer to retirement.

Don’t Forget the Employer Match

Most employers offer to match a percentage of what you contribute. For example, if you put in 5%, they might throw in 3% or even match your full 5%. It depends on the company’s policy.

Here’s something important: Employer contributions are always pre-tax, even if you’re making Roth contributions. Keep that in mind when planning your tax strategy.

What About 401(k) Loans?

Some 401(k) plans let you take out a loan from your balance. You pay it back through your paycheck—with interest. But here’s the cool part: the interest goes back to your account. You’re paying yourself, not a bank.

Just a heads-up—if you leave your job with an unpaid loan, you might have to pay it back right away. If you don’t, it could default, and the unpaid balance becomes taxable income for the year. So, plan carefully.

IRA’s

There are two main types: Traditional IRA and Roth IRA. The difference? You guessed it—taxes.

Traditional IRA = Pre-tax (you pay taxes when you take the money out)
Roth IRA = After-tax (you pay taxes now, but withdrawals are tax-free later)

2025 IRA Contribution Limits:

$7,000: Standard
$8,000: If you’re age 50+

There are also income limits for Roth IRA contributions:

Married filing jointly: Must earn under $236,000
Single filers: Must earn under $150,000

For Traditional IRAs, it depends on whether you or your spouse have a workplace retirement plan:

If both of you are covered: Income must be under $126,000
If only one of you is covered: Limit is $236,000

IRA Early Withdrawal Exceptions

Normally, taking money out before age 59½ results in a 10% penalty (plus taxes for Traditional IRAs). But there are exceptions if you’re a first-time home buyer, or you’re using the money for education purposes. If it’s a Traditional IRA, you’ll still owe taxes on the withdrawal, even if the penalty is waived.

Required Minimum Distributions (RMDs)

If you have a Traditional IRA or a pre-tax 401(k), the IRS requires you to start taking money out once you hit age 73. Why? Because Uncle Sam wants to tax that money—you can’t just let it sit there forever.

Final Thoughts

There’s a lot to consider when it comes to retirement planning and taxes. It’s a smart move to sit down with both a financial advisor and a tax pro to make sure you’re making the most of your options.

And if you ever want to chat more about how all this could apply to your specific situation, reach out to us at Pack Tax. We’d love to sit down with you and help you map it all out.