How do I minimize taxes on my 401(k)?

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Dan asked:

Maximize your contributions

While it won't reduce your taxes, you should prioritize putting more money into retirement accounts, according to Andy Timmerwilke, managing director and financial adviser at Merrill Lynch Wealth Management.

For those under 50, the maximum annual contribution is $23,500 in 2025. If you're 50 or older, you also can include a $7,500 catch-up contribution for a max of $31,000.

"For a lot of people, that's a high number to achieve," Timmerwilke said. "My advice would be to always do as much as you can, especially in the last few years as you approach retirement."

Roll over funds into a Roth 401(k)

For those with a traditional 401(k), consider contributing to a Roth 401(k) where the money can grow tax free. Then when you retire, "you have a lot of freedom and flexibility on distributing those assets," Timmerwilke said.

As you approach retirement, you also could roll your traditional 401(k) funds into a traditional IRA account at a financial institution. Then, you can do what's called a Roth conversion on some or all of the funds.

"The benefits of that is once money comes out of that Roth IRA, you're able to extract money tax free," Timmerwilke said. "The disadvantage is you do have to pay up-front taxes on the amount that is converted. So for most individuals, it would make sense to have enough assets or liquidity needs outside of a 401(k) to pay those up-front taxes. But [it's] a great solution and something that we see a lot of investors do as they retire or approach retirement."

Also, if you make regular donations to a charity, you should consider using your IRA. Generally, IRA distributions are taxable but if you send the money directly to a qualified charity, it would be tax free.

"It would not be taxed as ordinary income for you. You could save the money that you're already contributing to those organizations," he said.

Check your investment portfolio

Think about the basics: How is your money being invested? Will it last for several decades?

"We always recommend a very balanced approach, a combination of growth investments but also some more stable investments so things like bonds," Timmerwilke said.

He said the minimum distribution you're required to take out at age 73 is around 4% of the account's value.

"If the distribution rate is approximately 4% of the portfolio's value, obviously we need the portfolio to do better or return a higher percentage than 4%," Timmerwilke said. "It's important that you understand the underlying 401(k) or IRA account really needs to viewed as a long-term account that lasts for multiple decades. If you're just investing in really conservative [accounts] ... that money will not last for two, three, three and a half decades. So we really encourage that balanced approach."

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