Understanding Retirement Plan Options
By: Stock & Mutual Fund Hotline
Fall 2025 (Vol. 43, No. 3)
The main differences between a Traditional IRA, Traditional 401(k), and Roth accounts boils down to when you pay taxes (now vs. later), how much you can contribute, when you can withdraw funds and whether your employer can add to your contributions.
A Traditional IRA (including SEP and SIMPLE IRA) is funded with pre-tax or tax-deductible dollars. This is a good choice for individuals without an employer plan or who want extra tax-deferred savings. This plan requires you to take Required Minimum Distributions (RMDs) in the future.
A Traditional 401(k) is like the Traditional IRA except this plan is through your employer. An additional benefit is it allows higher contribution limits, and it often includes employer match.
A Roth IRA is funded with after-tax dollars. This means you don’t get any tax benefit from your contribution today. However, your money will grow tax-free and future withdrawals will be tax free. There are no RMDs which gives you more flexibility later in life.
A Roth 401(k) gives you the same benefits of the Roth IRA, but with higher contribution limits and the potential for employer match (this match goes into a traditional account).
Q: What is a Roth Conversion?
A: A Roth conversion is when you move money from a traditional IRA (Individual Retirement Account) or other pre-tax retirement account (like a 401(k) that’s rolled into an IRA) into a Roth IRA.
With a Traditional plan you must pay taxes on future withdrawals so switching to a Roth where withdrawals are tax free sounds like a great plan. However, with tax deferred accounts, there is always a payday some day. When you transfer from a Traditional to a Roth, you must pay ordinary income taxes on the amount you convert. The amount converted is also added to your taxable income for that year.
If you meet the requirements (generally, age 59½ and the account is at least 5 years old), withdrawals are tax-free. But a Roth conversion doesn’t benefit everyone equally. Those who benefit most from a Roth conversion generally fall into one or more of the following categories:
- Individuals that Expect a Higher Tax Rate in Retirement. Converting now means you’ll pay taxes at a lower rate today to avoid paying at a higher rate later in retirement. This could be a smart move for a young professional early in their career, someone having a lower income year or people in a “gap year” between retirement and when Social Security or RMDs (Required Minimum Distributions) start.
- Retirees Before RMDs Start (Typically Age 59.5 to 73) This group often has low income before Social Security or RMDs begin. This creates a window of opportunity to convert funds at a lower marginal tax rate. You can “fill up” lower tax brackets (like the 12% or 22% bracket) with conversions. The goal is to convert only up to the amount that you can afford to pay the conversion tax on.
- People Who Want to Leave a Tax-Free Inheritance. Heirs who inherit a Roth IRA get tax-free withdrawals (subject to certain rules). This is especially powerful under the SECURE Act, which requires inherited IRAs to be emptied within 10 years—tax-free growth is a big advantage. This is ideal for high-net-worth individuals or those who don’t need to spend all their retirement savings.
- Taxpayers Concerned About Rising Tax Rates. If you believe tax rates will increase (either personally or across the board due to national debt, policy changes, etc.), you might prefer to pay tax now at a known rate.
- Those Who Can Pay the Conversion Taxes with Outside Funds. Paying the taxes due on the conversion without using money from the IRA makes the strategy more efficient. It lets more money grow tax-free inside the Roth.
Roth conversion is less Ideal for:
- Those currently in high tax brackets and expect to be in a lower bracket later.
- People who need to use converted money soon. Roth restrictions require you to wait 5 years before you begin tax free withdrawals.
- Those who don’t have the cash on hand to pay the taxes due on large conversion amounts.
- Those who may trigger Medicare IRMAA surcharges (if over ~$103k income single / ~$206k married)
- Those who are close to a higher tax bracket. The income from a tax conversion can push you into a higher bracket and may eliminate tax breaks you would typically benefit from.
Q: When discussing ROTH conversions, I see a lot about filling up the 12% or 22% bracket. What does that mean?
A: This is a strategy to keep the amount you convert each year from triggering a higher tax bracket. For example, let’s look at the 2025 Married Filing Jointly (MFJ) Tax Brackets:
| Bracket | Taxable Income Range |
|---|---|
| 10% | $0 - $23,200 |
| 12% | $23,201 - $94,300 |
| 22% | $94,301 - $201,050 |
The Top of the 12% bracket is $94,300 taxable income. The 2025 standard deduction for MFJ = $30,900. So your adjusted gross income (AGI) can be about $94,300 + $30,900 = $125,200 for you to still stay in the 12% bracket (assuming no other deductions or credits). Let’s say you and your spouse had income of $60,000 in 2025, that means you could convert $65,200 ($125,200- $60,000) to Roth without bumping into the 22% bracket. (The total tax due on this return would be $10,852 with around $7,824 of that being due to the conversion amount).
Q: How is the Required Minimum Distribution (RMD) affected by which Retirement Account I choose?
A: A Required Minimum Distribution (also known as an RMD) is the minimum amount of money that someone with certain retirement accounts (like a traditional IRA, 401(k), or 403(b)) must withdraw each year after reaching a certain age. As of current U.S. law, RMDs typically start at age 73 (or 75 for some people depending on their birth year). When choosing a retirement plan, RMDs are a big factor. If you don’t take your RMD on time and for the right amount, the IRS can impose hefty penalties.
The RMD is calculated by using your account balance at the end of the previous year and dividing that by a “life expectancy factor” from their tables. For example, if your account balance is $500,000 and the IRS factor is 26.5, your RMD for the year will be $18,868. ($500,000 ÷ 26.5 ≈ $18,868)
Roth IRAs are NOT subject to RMDs while the original owner is alive) After death, beneficiaries may have RMD requirements depending on their status. The Roth 401(k) was previously subject to RMDs, but starting in 2024, Roth 401(k)s no longer have RMDs during the owner’s lifetime.
All traditional IRA types (including SEP and SIMPLE IRAs) are subject to RMDs.
RMDs must start by April 1 of the year after you turn 73 (if you were born in 1951 or later — this age may rise to 75 in the future depending on birth year).
For Employer-sponsored plans such as 401(k) (including traditional 401(k)s), 403(b) (used by schools and nonprofits) and 457(b) (governmental deferred compensation plans) RMDs generally must begin at age 73, but if you’re still working and not a 5% owner, you may be able to delay RMDs from your current employer’s plan until retirement.
If you inherit an account, RMD rules depend on your relationship to the original owner and when they died. Many non-spouse beneficiaries must empty the account within 10 years (under the SECURE Act), though some must also take annual RMDs during that period.