Don't File Your Taxes Yet...

Don’t File Your Taxes Just Yet…

Before filing your taxes this year, consider opening or contributing to an IRA or a Roth IRA. Making an IRA contribution could potentially save you money on taxes while also securing your financial future—a win-win!

Understanding Individual Retirement Accounts (IRAs)

The Individual Retirement Account (IRA) was introduced in 1974 under the Employee Security Act and became popular with the 1981 Economic Recovery Act. Originally, these accounts were designed for individuals without employer-sponsored retirement plans. Over the years, they have evolved to become essential tools for retirement savings.

Enough history—what matters most is that you start setting aside money for retirement today. Your future self will thank you!

To make things simple, I have put together a chart below that explains different types of retirement accounts, their rules, and how they work. It lists the most commonly used accounts.

How Retirement Accounts Work

Retirement accounts such as IRAs, Roth IRAs, 401(k)s, and 403(b)s are designed to help you save for the future. When you contribute, your funds are placed in an account under a specific retirement title (e.g., IRA, Roth IRA, 401(k), etc.), but that alone isn't enough. You must invest the funds wisely to ensure growth over time.

Some investment options include:

• Mutual funds

• Index funds

• ETFs (Exchange-Traded Funds)

• Individual stocks

• Treasuries and bonds

• Certificates of deposit (CDs)

  
  

Choosing the right investment depends on your risk tolerance and retirement timeline. Many financial institutions (banks, mutual fund investment firms like Vanguard, Fidelity, brokerage firms) make establishing an IRA or Roth IRA account and make investing the contributions easy by offering the accounts and a variety of investments.  Employer sponsored plans are handled by your employer.

Traditional IRA vs. Roth IRA

• Traditional IRA: Contributions are pre-tax, meaning they reduce your taxable income for the year. Your money grows tax-deferred, and you pay taxes when you withdraw funds in retirement.

• Roth IRA: Contributions are after-tax, so you do not get an upfront tax deduction. However, your money grows tax-free, and withdrawals in retirement are tax-free (if certain conditions are met).

  
  

If you expect your tax rate to be lower in retirement, a Traditional IRA may be more beneficial. If you anticipate a higher tax rate later, a Roth IRA is the smarter choice.

Important: Withdrawing from an IRA before age 59½ results in a 10% penalty unless an exception applies. Traditional IRAs require Required Minimum Distributions (RMDs) starting at age 73, whereas Roth IRAs do not.

Tax-Efficient Withdrawal Order in Retirement

To minimize taxes in retirement, you should strategically withdraw funds in the following order:

1. Required Minimum Distributions (RMDs) – If you are 73 or older, you must take these first to avoid penalties.

2. Taxable Brokerage Accounts – Withdraw from stocks, dividends, and capital gains to allow tax-deferred accounts to grow longer.

3. Roth IRA Contributions (Not Earnings) – Withdraw contributions tax-free if needed.

4. Traditional IRA & 401(k) Withdrawals – Withdraw just enough to stay in lower tax brackets and avoid large RMDs later.

5. Roth IRA Earnings & Roth 401(k) – Save these for last, as they grow tax-free and don’t require RMDs.

This withdrawal strategy helps maximize tax efficiency, reduce lifetime tax burdens, and preserve wealth for your retirement years.

Final Thoughts

Planning for retirement is one of the best financial decisions you can make. By contributing to a retirement account today, you’re securing your financial future. If you’re unsure which option is best for you, I can help! Let’s discuss your financial goals and create a customized plan.

📩 Contact me at thedoctorsmomma@gmail.com or visit www.doctorsmomma.com  to schedule a consultation.

Remember, your future self will thank you!

 Understanding Different Retirement Accounts

The chart below breaks down various retirement accounts, their contribution limits, and important considerations:

Account	Description	Maximum Contribution	Income Limitations	Other Considerations
IRA	Individual Retirement Account - allows for individuals to set money aside for retirement, tax deferred (before paying taxes). Reduces income by the amount contributed to the IRA. At retirement, funds taken out, including the earnings,  are taxed at the current tax rates. Banks, mutual fund companies, brokerage firms offer these types of accounts. Then funds must be invested.	For tax year 2024 and 2025: $7000 per person; catch-up contribution for those over 50 can add an extra $1000.		There is a 10% penalty if funds are taken out of the IRA prior to age 59 1/2 . At age 73, RMD, required minimum distributions, must begin.
Roth IRA	Roth Individual Retirement Account - allows for individuals to set money aside for retirement AFTER paying taxes on the contribution.   At the time of retirement, funds dispersed from the account are tax free. Banks, mutual fund companies, brokerage firms off these types of accounts. Then funds must be invested.	For tax year 2024 and 2025: $7000 per person; catch-up contribution for those over 50 can add an extra $1000.	There are income limitations.	There is a 10% penalty if funds are taken out of the account prior to holding five years and under the age of  59 1/2. RMD's are not required for Roth IRA 's.
401k	401k is a plan offered by the employer to put aside funds for retirement.  Usually, the employer offers a match of a certain percentage to what the employee contributes.  For example, the employer will contribute 3% of your salary if you also contribute 3%.  This lowers your income but when the funds are taken out of the account, they are taxable.  This is done through automatic deductions from your paycheck.  Most plans offer an assortment of investments for your contributions to the account.  You must invest into one of the options available for your money to grow.	For 2024, you can contribute $23,000, with a catch-up contribution of $7,500 if you are aged 50 and over. For 2025, the contribution increases to $23,500 but the catch-up contribution remains $7,500. 401(k) plan participants ages 60 to 63 increase to $11,250 in 2025.		There is a 10% penalty on the amount if funds are taken out of the 401K before age 59 1/2.  There are ways to "borrow" the funds from the account, but most financial advisors strongly discourage this.
Roth 401k	Like the 401k as it is offered by the employer.  It allows you to contribute after tax dollars/income.  At retirement, these funds would not be subject to taxation.	These contributions would be after the maximum match is made in the 401k.		The amount contributed by the employer and employee cannot exceed $69,000 or $76,500 if  over 50 years of age or 100% of the compensation. 10% penalty if taken out before 59 ½.
403b	Like a Roth 401K but the employer is a non-profit organization.	These contributions would be after the maximum match is made in the 401k.		The amount contributed by the employer and employee cannot exceed $69,000 or $76,500 if  over 50 years of age or 100% of the compensation. 10% penalty
SIMPLE 401k	A retirement plan like the 401k but designed for small businesses with less than 100 employees.  Contributions are lower than a regular 401k plan.	Employees can contribute a maximum of $16,000 in 2024 and 2025.  Additional catch-up contributions of $3,500 if over 50 years old.	Age restriction of 21 years old to participate in plan.	The "SIMPLE" in a SIMPLE 401(k) plan is short for Savings Incentive Match Plan for Employees of Small Employers. Just like the other plans, if money is taken out before age 59 1/2, there is a 10% penalty.                                            Allows for loans.
SIMPLE IRA	Like the SIMPLE 401K as it is designed for small businesses to offer their employees.	Employees can contribute a maximum of $16,000 in 2024 and 2025.  Additional catch-up contributions of $3,500 if over 50 years old.		There is a 10% penalty if the funds are taken out of the account prior to age 59 1/2. Loans are not allowed.