7 Ways to Maximize Your IRA in 2025

Key Takeaways

• When deciding between a traditional IRA contribution or a Roth IRA contribution, the key thing is the tax break. Is it more beneficial at the time of contribution or in retirement? Because your tax rate will be lower either at the time of contribution or at the time of withdrawal.
• There are income limits to keep high-income people from investing in an IRA, but the backdoor Roth IRA can help get around those limits.
• When it comes to IRA contributions, don’t wait to add your contributions even though your deadline is April 15.
• When deciding where to invest IRA contributions, a target-date fund is a great option.
• Another way to maximize your IRA is to conduct a cost audit.
• It’s smart to revisit your beneficiaries in an IRA.
• When deciding whether you should be converting to a Roth from a traditional IRA, it’s really important to get some tax advice to avoid bumping yourself to the next tax bracket.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Whether you’re contributing to an IRA for the first time or have been investing in one for years, Morningstar’s Christine Benz has some tips for getting the most out of an IRA in 2025. And she’s here with me today to discuss some of them. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Thanks for being here today, Christine.

Christine Benz: Susan, it’s great to see you.

Traditional IRA vs. Roth IRA

Dziubinski: All right, so let’s start. For people who are funding an IRA, one of your first decisions is, “OK, do I do a traditional IRA or do I do a Roth IRA?” How can someone make sure they’re making the right choice and really maximizing the tax benefits for their particular situation?

Benz: The income that you’ve earned, the earned income that you have, that’s going to set your parameters right there because there are income limits that apply to traditional deductible IRA contributions as well as Roth IRA contributions. But assuming you find yourself in a position where you could do either that traditional deductible contribution or a Roth contribution, the key thing you’re thinking about is, is the tax break more beneficial to me at the time of contribution or is it likely to be more beneficial to me in retirement because my tax rate will be lower at either the time of contribution or at the time of withdrawal in retirement. So, you want to kind of peer into the future. It’s very difficult to say for some people, maybe splitting the difference between the two types of contributions is an idea. But certainly, there are folks who are, say, older workers who have not yet amassed a lot of retirement assets. They may actually be really good candidates for traditional tax-deferred contributions if they can deduct that contribution. It’s not necessarily all Roth all the time.

How the Backdoor Roth IRA Maneuver Can Help With Income Limits on IRAs

Dziubinski: Christine, as you alluded to, there are income limits, and they aim to keep high-income people from investing in an IRA. But you say that people shouldn’t necessarily let those income limits get in the way. What do you mean by that?

Benz: Right. This backdoor Roth IRA maneuver is alive and well here in 2025. And the basic maneuver is that you contribute to a traditional IRA. There are no income limits to make that type of contribution, assuming you’re not deducting it on your tax return. And then you convert it to a Roth at some point in the future. If you haven’t racked up a lot of investment gains from the time you made the contribution to the time that you do that conversion, it should be mainly not a taxable event. The key wrinkle is if you have a lot of other traditional IRA assets that you’ve never paid tax on, then the conversion may be at least partially taxable. So, get some tax guidance here. But this is a strategy that people can use if they are shut out of those direct Roth IRA contributions to get some money into that Roth IRA column.

When Should Investors Do Their IRA Contributions?

Dziubinski: Let’s talk a little bit about the timing of IRA contributions. And you’ve shared research in the past from IRA providers, asset managers, who point out that most people, where they see the flows coming in from people opening IRAs is at that last-minute tax time deadline, got to get it in before I file my taxes. Is that really the optimal approach to funding an IRA?

Benz: Well, absolutely not. So there’s an opportunity cost there, right? If you’re waiting, say, 12 or 15 months longer than you actually need to, to get the funds invested, get them in the account, then there is going to be some slippage in your return versus jumping on it early after the turn of the calendar. So, for the 2025 tax year, for example, you can fund that IRA today if you want. The idea is to step on it with respect to those contributions, even though your tax filing deadline is the deadline, that April 15 deadline. Don’t wait until the very last minute to get the money into the account.

Where to Invest Your IRA Contributions

Dziubinski: How about deciding where to invest that money? Again, we hear from asset managers, IRA providers saying people will put the money in an IRA, but then they’re not investing it. How can people overcome that paralysis?

Benz: Vanguard had some great research where they shone the light on this very problem, that they saw the money coming in but then it just sat there in cash because people were probably more focused on getting their taxes done, doing what their accountant told them in terms of funding the account, and then they didn’t actually get the funds invested. I love the idea of just having some sort of default for your IRA contributions. I think a target-date fund is a beautiful investment type to use within the IRA context. We mainly think of them as being for 401(k) investors, but there’s no reason why you can’t just have that single no- to low-maintenance option within the account, and then you can just reduce the guesswork and get the money invested.

How a Cost Audit Can Help You Maximize Your IRA

Dziubinski: You think another way to maximize your IRA is to conduct a cost audit. Why do you think this is important, and what can it yield for an investor?

Benz: Certainly all of our research here at Morningstar points to the importance of costs, keeping them down if you possibly can. Just do a little bit of due diligence on what you’re paying for your investments inside of your IRA. You’re probably not paying any additional administrative expenses for that IRA. Most investment firms do not have any extra expenses but check that too. Do that cost audit of the investments themselves. If you use our portfolio functionality on Morningstar.com, our X-Ray functionality within the portfolio tool will give you an asset-weighted expense ratio and a comparison of how you’re doing relative to the standard fees that would apply to a portfolio that was similarly allocated. So, check that and see how you’re doing it. Maybe if you’re in cheap index funds, you’re doing perfectly well, but maybe you have some also-ran expensive funds in that IRA portfolio, too.

Why You Should Revisit Beneficiaries in an IRA

Dziubinski: You also think it’s smart to revisit your beneficiaries in an IRA. Why is now a good time to do that?

Benz: One reason is that we have seen some changes in the rules around inherited IRAs. The short answer is that the benefits of someone inheriting an IRA from you are a little bit less because in many circumstances they’ll need to spend through and pay taxes on that account within a 10-year period. At a minimum, make sure you’re keeping those IRA beneficiary designations up to date, but also just make sure that you’re checking with your estate planning attorney to make sure that those beneficiary designations match what makes sense for them and for you from a tax standpoint.

Should You Convert Your IRA to a Roth From a Traditional?

Dziubinski: Then lastly, another perennial question about IRAs is whether you should be converting to a Roth from a traditional. How should investors be thinking about whether that’s a good move for them?

Benz: This is a huge question, Susan. It’s really important to get some advice here rather than just back-of-the-enveloping it because if you’re working with an advisor who is tax savvy here, she can tell you how much you could reasonably convert each year to avoid bumping yourself into the next highest tax bracket. They may also or should also be able to give you some advice about whether it even makes sense to convert. If you’re still earning a good salary and working, it oftentimes doesn’t make sense to do those conversions, but the period just after retirement and before those required minimum distribution start, that is a really fruitful period to consider doing some conversions. Get some help there because it can save you a lot taxwise if you are doing the conversions, but it has to add up for you in the year in which you make the conversion as well.

Dziubinski: Got it. Well, Christine, always a pleasure tapping into your IRA expertise this time of year. Thanks for your time.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch 7 Retirement Must-Knows for 2025 for more from Christine Benz.