In Focus – SCCCU Blog

When we talk about "tax advantages" in the context of retirement accounts, we’re talking about ways to reduce how much you have to pay the IRS, either now or in the future. Different retirement accounts offer different tax benefits, and knowing how to use them can mean more money in your pocket over the long run.

Employer-Sponsored Retirement Plans

One of the best and most effective ways to save for retirement is by contributing to an employer-sponsored retirement plan like a 401(k), 403(b), or 457(b). The great news is that contributions to these accounts are usually made with pre-tax dollars, which means the money is taken out of your paycheck before taxes are applied. This lowers your taxable income for the year and helps you save more overall.

In 2025, you can contribute up to $23,500 to these plans if you’re under 50. If you’re 50 or older, you can contribute an additional $7,500 as a catch-up contribution. And if you are between 60 and 63, you can toss in an extra $11,250.  Once the money is in the account, it grows tax-deferred until you withdraw the funds in retirement.  At that point, you pay income taxes at your current (and often lower) rate.

Notably, many employers have also rolled out Roth versions of these accounts.  These also have tax advantages, but they work differently: You contribute money on which you’ve already paid taxes.  The money grows tax-free, and there are no additional income taxes upon withdrawal.

Individual Retirement Accounts (IRAs)

If your employer doesn’t offer a retirement plan or you want to save even more for retirement, you’ll want to consider an Individual Retirement Account (IRA). There are two main types of IRAs: Traditional and Roth.

• Traditional IRA: Contributions to a traditional IRA may be tax-deductible (depending on how much you earn), which could reduce your taxable income for the year. However, you’ll pay taxes when you withdraw the money in retirement. This is a good option if you expect to be in a lower tax bracket when you retire.
• Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, so they don’t reduce your taxable income today. However, withdrawals in retirement are completely tax-free, which can be a huge benefit if you expect to be in a higher tax bracket when you retire.

The contribution limits for traditional and Roth IRAs are the same; in 2025, those under age 50 can contribute up to $7,000 into an IRA, and those over 50 can contribute up to $8,000.

Important notes: You have until the date you file your tax return to make contributions for the previous year. (In other words, you can still contribute to an IRA for 2024 before you file your 2025 taxes!) This gives you extra time to maximize your contributions and optimize your tax strategy.

Also, note that an income limit exists to contribute to Roth IRAs. Single filers earning more than $165,000, or married filers earning more than $246,000, are ineligible to contribute.

Health Savings Accounts (HSA)

You might not think of a health savings account (HSA) as a retirement tool, but it can be powerful. An HSA, available to people with high-deductible health plans, offers a unique triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. The money in your HSA is yours for life, and after you turn 65, you can withdraw the money for any reason (not just a medical expense) and you’ll face no tax penalty.  (If you use the money at that time for non-medical expenses, you will pay income taxes on any prior growth, just as you would when pulling money from a 401(k).)

In 2025, you can contribute up to $4,300 to an HSA for self-only coverage, or $8,550 for family coverage. If you’re 55 or older, you can make an additional $1,000 catch-up contribution. (Remember that these limits include any contributions your employer may also make, so keep an eye on your totals!)

What to Do at Tax Time

When tax season rolls around, make sure that you review your contributions and double-check that you contributed the maximum amount possible to your retirement accounts. If you want to increase your contributions for next year, that’s great! Just chat with your HR department (or a Credit Union representative if you have an IRA) so you can bump up your contributions ASAP. Also, keep good records and save all statements, receipts, or confirmations related to your contributions. This will make filing your taxes a breeze and save you a few headaches.