When Adding to Your Retirement Plan is a Bad Idea

You're retired now; you're not supposed to pay taxes anymore. Simple strategies to avoid taxes on capital gains, retirement distributions and Social Security.Building a large nest egg fast requires fancy footwork involving a high savings rate and avoidance of taxes. At least that is the conventional wisdom. 

But conventional wisdom has been wrong before and even in demographics such as the FIRE* community where the idea of maxing out retirement accounts is practically a religious belief, cracks are beginning to appear.

Less understood are the benefits of NOT investing in a retirement account. Yes, traditional retirements accounts (tIRA and t401(k)) reduce your taxable income while providing tax deferred growth. But when the money comes out it is all taxed at ordinary rates while a similar investment in a non-qualified account will largely have been taxed at the lower long-term capital gains (LTCG) rate, though without any tax deferral.

Other serious issues arise from fully funded retirement accounts. Once you hit age 70 1/2 you must take a distribution from traditional accounts—the dreaded required minimum distribution (RMD). RMDs reduce your ability to control your tax matters which means fewer potential tax credits, higher Medicare premiums and taxation on up to 85% of your Social Security benefits.

 

A Growing Problem

Recently I was a guest on The FI Show podcast. Cody and Justin did a great job prying solid tax information out of me. Things I think are normal problems to deal with are unheard of by the general public. Except the general public will suffer the consequences. And Cody and Justin knew a good story when they heard it. 

The one issue I brought up that shocked most was the size of the RMD some people will face and the catastrophic tax issues involved as a result. I mentioned I have a few clients looking down the barrel of a half million dollar RMD when they hit 70 1/2. This was shocking news, but it shouldn’t be.

The broad stock market averages in the U.S. (S&P 500, for example) tend to increase about 10% per year on average, or about 7% after inflation. (Stocks for the Long Run by Jeremy J. Siegel)  Depending on the time frame covered skews the averages a bit above or below the stated returns so we will use these numbers loosely for illustrative purposes only. 

5 ways to avoid taxes on required minimum distributions. Tax-free retirement income. Why a non-retirement account can be better than a retirement plan.This means if you invest $1,000 today in a broad-based index fund you can expect the investment to double in nominal terms in around 7 years and in real terms every 10 years. 

Here is where the problems begin. A common question from clients is how to add even more to their retirement plans to defer taxes. If the client is in the early stages of building wealth this makes sense. But if a client is 50 with $2 million in traditional retirement plans we need to discuss the issues further before adding to the stack.

Remember, a 50 year old will need to start taking required distributions in 20 years. Since, on average, the investment will double every 7 years in nominal terms the $2 million doubles to $4 million, then to $8 million and then to nearly $16 million when RMDs kick in!

While $2 million sounds like a lot—and it is; trying to save a few more tax dollars today can hurt you a lot later. In the example above the RMD the first year exceeds $500,000! There is not a lot of tax planning I can do for you at that point to help you. It’s required! That means control of your tax situation is reduced to the point of Band-Aide solutions, if that. 

Now I understand you might be younger and have less than $2 million socked away. But the earlier you start (I’m talking to members of my FIRE community here) the bigger the numbers get. If, for example, you manage a mere $100,000 in your traditional IRAs and 401(k) by age 30 and never drop another dime into those accounts and the market just performs average you get 40 years of compounding growth, or almost 6 doublings! 

Visualize the growth. From $100,000 to $200,000 to $400,000 to $800,000 to $1.6 million to $3.2 million to almost $6 million! (Remember we get just shy of 6 doublings.) 

Six million is a smaller problem than our first example, but still an issue. And it assumes you never defer another dime into your traditional retirement accounts.

 

5 Ways to Avoid RMD Problems

Whenever I consult with a client I have to make clear my advice will consider “all years” rather than just “this year”. If my advice saves you money this year but increases your taxes the next or some future year, the benefit is less than it appears up close. 

Traditional retirement plans are just such an example where “all years” planning is so important. A few million in a traditional retirement account with generate adequate RMDs to cover a very ample lifestyle. The drawback is the increased taxes on Social Security benefits and taxes on the RMD at ordinary rates.

When adding to your retirement account can cost you taxes later. Alternatives to retirements plans. Retirement planning for tax-free living.Solution 1

After a certain point (your facts and circumstances will determine that point) it is better to fill your Roth IRA or use the Roth feature of your 401(k). Yes, the Roth gives you no up-front tax deduction. But, the earnings growth is NOT deferred; it is TAX-FREE! 

RMD issues don’t plague the Roth investment the way it does traditional plans. Roth distributions are also tax-free which add flexibility to tax planning in later years. This makes the job for a future Wealthy Accountant working with you to save you money easier. (I assume I’ll retire at some point, if only because I forget to breath one day.) 

Also where traditional retirement plans are a tax nightmare for beneficiaries when you die, the Roth is a much more pleasant experience. 

I’m perplexed when people show reluctance in filling a Roth investment. The tax deduction today in minor compared to the future taxes avoided due to the tax-free nature of Roth growth! Remember, this thing tends to double every 7 or so years. A 25 year old dropping a mere $5,000 into a Roth can expect somewhere around $500,000 at age 70! That means $495,000 tax-free dollars. I’m sorry, I can’t find you a better deal than that. (Not legally, at least.)

Solution 2

There also seems to be a fear amongst some when it comes to investing in non-qualified (non-retirement) accounts. To these people there is something sacrilegious about not getting a deduction and paying taxes as you go. And I can’t understand why.

Think of it this way. When you take money from your traditional retirement plan, the one you got a deduction for up front and enjoyed tax deferral on the gains, you pay tax at ordinary rates which currently top out at 37%. And state taxes can add more.

But your non-qualified plan also enjoys a lot of tax deferral! Index funds are by design tax efficient. This means they are not trading a lot to get incremental gains at the expense of extra taxes. This also means most index funds throw off few capital gains, hence a de facto deferral. Only dividends are currently taxed and most of these are qualified and taxed at LTCG rates. 

The highest LTCG tax rate is 20%. And many will pay 0% tax on LTCGs. (In 2019 a joint return can have income up to $78,750 before LTCG are taxed. And the 20% rate doesn’t kick in until your reach $488,851.) 

Because a lot (most) of your gains are deferred anyway with an index fund and the tax rate is lower when you do sell (compared to traditional retirement accounts) and there are no RMDs or early withdrawal penalties, non-qualified accounts should play a central role in the portfolio of most investors.

The deductible retirement account investment is not the default.

Keith’s Rule 76: If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it.

This means that dropping money into a 401(k) at work needs matching to offset the future losses from higher taxes and RMD issues. It also means you need to consider if a contribution to a traditional retirement account will provide larger credits elsewhere (Education Credits, Saver’s Credit, Earned Income Credit, Premium Tax Credit, et cetera). 

It’s not always a simple calculation. An IRA deduction might not work while profit-sharing in your business might. Facts and circumstances play a vital role. 

Solution 3

Once you reach age 59 1/2 you can start taking money out of your retirement accounts without tax penalty. This makes a lot of sense if you retire early, even if you don’t need the money.

Your income level will determine if this works for you.

By the time you reach 60 you may either have retired or slowed down to part-time or accepted a less stressful, lower income profession. As a result your tax bracket might be zero or something close to it.

With the standard deduction for joint returns now $24,000, many will have ample room to move money from retirement accounts early. If your income is comprised of LTCGs only there is an opportunity to move some money from retirement accounts tax-free.

Remember, joint returns enjoy tax-free LTCGs up to $78,750 of income. If you take a $24,000 distribution from your traditional retirement account and have another $40,000 of LTCGs you would pay zero tax. The standard deduction would cover the retirement distribution and your income would not exceed $78,750 so your LTCGs would also be tax-free.

Take taxes out of retirement. You paid taxes your entire working life. It's about time you got to live without government fingers in your pocketbook.Solution 4

Some of you are hyper-savers and started maxing out retirement accounts at a young age. Now you have $1.5 million and you still haven’t reached the ripe old age of 40. Your RMD issues are going to be huge even if you stop adding to the pile now.

Your reasoning for building such a large nest egg at a young age was so you could take time to be with family and travel.  Enter Section 72(t) of the Tax Code.

Section 72(t) says you can withdraw money at any age from your traditional IRA without penalty if you follow a few rules.

  1. Distributions are based on IRS tables. The larger your account balance and the older you are the more you can access under 72(t).
  2. Once started, you must take the same distribution each year for at least five years or until you reach age 59 1/2, whichever is later. (There are some rules that allow for increasing your distribution each year based on inflation.)

Distributions under 72(t) are taxed as ordinary income without penalty. 

Warning! If you fail to continue taking the required 72(t) distribution for 5 years or until age 59 1/2, whichever come later, all prior distributions under 72(t) are subject to penalty.

Section 72(t) is a powerful tool in tax planning for early retirees. Since your income is lower you effectively get tax-free, or nearly so, distributions while also enjoying potential tax-free LTCGs.

Solution 5

Sometimes I have to pull out all the stops to protect my client. That is why I consider it vital to keep RMDs below a certain threshold if at all possible.

The reason I mentioned on The FI Show podcast a few clients I have facing $500,000+ RMDs is because I lose all control in tax planning with these clients. Which begs the questions: At what level of RMD do I retain at least some control?

Glad you asked.

The answer is: $100,000.

Here’s why.

Under current tax law I can have my client elect to have up to $100,000 of her RMD sent to a charity of her choice and not include it in income.  

This is more important than you think! The ability to not include up to $100,000 in income allows me to potentially access a large sum of LTCGs are low or no tax. It might also allow fewer Social Security benefits to be included in income. 

This strategy allows me to micromanage with the client for an optimum tax outcome. The more room I have to move, the better the magic I can perform.

 

Final Comments

Conventional wisdom is NOT always right! Filling retirement accounts to the brim make for great titles on CNBC and personal finance blogs, but around here we are more interested in workable knowledge. One size does not fit all.

Consider this one last point. A non-qualified account not only enjoys significant tax deferral and lower tax rates on LTCGs, but also opens the possibility to tax-loss and -gain harvesting. Two additional powerful tools in the wealth-builders toolbox.

Always consider your facts and circumstances. I’ve consulted with several thousand clients this past decade and it is rare that any two got exactly the same advice. It is never that easy. Never. The individual is important. You are the most important part of the equation. 

These ideas I shared with you today are only a start. They are the framework to build your financial plan. But the details require the master’s touch.

 

* Financial independence, retire early

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 

Keith Taxguy

34 Comments

  1. Rachel on April 1, 2019 at 8:39 am

    Keith,
    What a great post really fleshing out so many aspects of retirement planning that aren’t often thought about. I’m wondering why you didn’t mention the possibility of converting some of your traditional IRA to your Roth IRA bucket each year as another possible solution? Our family is creating this Roth conversion ladder to reduce the size of our traditional IRA in $20K chunks each year while still keeping our joint taxable income after deductions below that $78K mark.
    Thanks for all the fabulous content!

    • Keith Taxguy on April 1, 2019 at 8:50 am

      Ahhhh! YES!!!

      That is such an obvious solution, Rachel. Yes, converting your traditional IRA to a Roth in increments is a perfect solution.

  2. Jen on April 1, 2019 at 9:38 am

    This post is exactly what I needed! First, my mom (69) is currently in the situation of trying to decide what to do with my dads tIRA (he passed 2 years ago). She is so worried about the RMD’s bumping her into the next tax bracket. She’s trying to find that magic number of what she can take out now and add to her Roth without negatively affecting her situation. It’s causing a lot of stress! Second, I’m an IC and get no benefits whatsoever. I contribute to my Roth and brokerage funds and was feeling pretty down while doing my taxes, wishing I had more tax deductible options. But after reading this I realize that I’m on the right track. In the long run I may break even, or even come out ahead compared to those with 401k’s or tIRAs. Thank you! I’m sharing this post 🙂

  3. Mr. Hobo Millionaire on April 1, 2019 at 12:15 pm

    >>A 25 year old dropping a mere $5,000 into a Roth can expect somewhere around $500,000 at age 70!

    I recently started “playing around” with the math of a twenty-something saving $1000-$5000, too (and even the many $1000-$5000 mistakes we make in our 20’s). The math is simply ASTOUNDING. I came to the conclusion that many young people would be better putting off nearly everything in their 20’s and saving as much money as possible. At age 30 you could blow your money doing most anything else you wanted to do in life, and let your “20’s” saving compound.

    • Keith Taxguy on April 1, 2019 at 12:24 pm

      Agreed!

    • Katie Camel on April 5, 2019 at 3:11 pm

      I totally agree. I started investing at 14, but spent most of my 20s chasing artistic endeavors. While I lived as frugally as possible in a VHCOL area, I still managed to save as much as possible, which really wasn’t all that much. Yet I knew those small amounts would add up to massive amounts over time and continued to invest every last dollar I could. Had I not done that, I wouldn’t be halfway to FI at this point. The only thing that gets me is that if I hadn’t chosen the starving artist path in my 20s, I would’ve been FI already. Even so, I wouldn’t change most of my past. I’ll never regret pursuing my dreams. 🙂 These days, I enjoy a very nice salary in HCOL area, but I’m able to sock away so much because I honed those frugality skills so well in my leaner times! The growth is astounding at this point.

  4. Ashish Gupta on April 1, 2019 at 1:07 pm

    I’ve been maxing out my 401k not thinking much about future tax. I’m now buying a rental property and was questioning on saving more money for future purchases, this is a very timely article for me!

  5. SmileIfYouDare on April 1, 2019 at 1:28 pm

    I have to agree with you. I am 70+ and facing my first RMD this year which is over 50K. Nice problem to have, but with SS, my wife’s RMD, and other investment income, etc., I am now in the same tax bracket now as I was when I was working, Income is less, but same bracket. While I did save in non-tax defffered accounts, in retrospect (isn’t everything?), should done more.

    • dasfasdfdas on April 16, 2019 at 3:22 pm

      Solution 2 seems incredibly stupid. Lets look at a real simple example. 40% OI, 20% LTGC and you have 100k. Investments go up 10x
      a) tax deferred
      100k*10x = 1 million dollars. I pay 400k in taxes. I can spend 600k
      b) taxable
      (100k-40k in OI taxes)*10x = 600k- 100k of taxes (500k gains at 20%) = 500k to spend

      Sure in taxable you only paid 140k in taxes instead of 400k, but wouldn’t you rather optimize our spendable money than minimize your taxes? Personally I would much rather have 600k than 500k. With taxable accounts versus tax deferred, you pay OI AND LTGC. Yes the OI is on a smaller number BUT it you are also paying those taxes years in advance. That 40k in year 1 is the same as 400k in they year the money comes out. For taxable to win, you need to be in a higher situation in retirement than when working. That is possible. Note we also ignored tax drag on the taxable account. Paying 20%/year on your dividends doesn’t seem like much, but it adds up over 30 years.

      With the ROTH, you have the same thing. Having all those tax free gains is great. The question is would you have more spendable money by doing tax deferred. You need to make a lot of assumptions to figure that out.

  6. Dave on April 1, 2019 at 2:11 pm

    Thanks so much for this article, it is very interesting. What are your thoughts on preferring the 401k over a taxable account due to the asset protection benefits?

    • Keith Taxguy on April 1, 2019 at 3:08 pm

      That is a whole different can of worms, Dave. My advice considers tax issues only as each state has its own unique set of laws (and I don’t like practicing law without a license). There are ways to protect assets while preserving maximum tax benefits. If your account values are high enough to consider what is discussed in this article you should already have a good attorney you talk to, helping you with asset protection and legacy planning.

  7. Tripplefiguy on April 1, 2019 at 2:15 pm

    Keith, this article is simple a masterpiece written with “the masters touch!” This should be bookmarked by all. Thank you for continuing to provide high quality advice and writing for the benefit of all to read.

    It really highlights the whole giving and providing value to others first is really how you receive the greatest benefit. It’s not a wonder why you have such a rocking practice, plutous award, 8 figure net worth, etc.

    A very important issue you brought up with the article is, “There’s no one size fits all.” That’s definitely very important to understand and highlights personal finance as very “personal.”

    Also, I think you bring up a great point in that people really should outsource important things like taxes once their tax situation becomes advanced. Hiring professionals and not going DIY on certain things can save you countless dollars down the road.

    One last thing I liked from the article that i completely agree with you on is,

    “If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it.”

    I like to look at how much tax % is it really saving you. The credits you mentioned are definitely something to be mindful of as with the EITC there is the “phase out range” or I think of it as phase out tax. Somewhere between 16-21% which is on top of your marginal tax plus state. It’s usually worth it to take the deduction in order to avoid that. Anything that saves you day above 25%.

    I also would like to thank you for suggesting a Roth a while back when all the tIRA deduction would have saved me is 9% state tax which forgoing that in favor of the Roth is probably the better choice based on all the things mentioned in this article.

    • Keith Taxguy on April 1, 2019 at 3:12 pm

      I was vague on the credits in the article, Tripplefiguy, because it gets complicated fast and I didn’t want to muddy the discussion. That is the individualized thing I was talking about. Facts and circumstances. A good tax pro should should like a broken record with those words.

    • James on April 1, 2019 at 8:40 pm

      Did you say in this article that LTCG are tax free as long as your income stays under $78000???? Did I read this wrong???

      • Keith Taxguy on April 1, 2019 at 9:43 pm

        For joint returns in 2019. Yes. See why I say traditional retirement plans are not always the correct default answer?

      • Karl on April 2, 2019 at 4:07 pm

        And that’s just “taxable income.” Add in another $24K for the standard deduction, and LTCG are taxed at 0% up to $102K of AGI. Yes, I preach this to the batch of my clients that are in the profile to make this work.

        • james on April 2, 2019 at 4:20 pm

          So just to be clear. If I have $30,000 of LTCG and my income is $89,000 I can deduct $24,000 and reduce my AGI income to $65,000 and pay ZERO TAXES on the $30,000 LTCG? I was under the impression they were taxed at 20% not 0%.

  8. Katy on April 2, 2019 at 12:26 pm

    Well, you have definitely given me peace about maxing out my RothIRA this year instead of opening a traditional just so I can get to a lower effective tax rate. (If I calculated correctly this year it was a whopping 2% or something). I should probably also look into a traditional brokerage account, maybe after deciding on the rent vs. own.

  9. Karl on April 2, 2019 at 4:13 pm

    Love this Keith. I get frustrated with my clients that get so narrowly focused on just getting this year’s tax bill as low as possible (or their refund as high as possible).

    For those clients that get to us too late to make a lot of these strategic moves you mention throughout earlier years, what are your thoughts on doing a massive Roth conversion in a single year, “bending over and taking it,” so to speak, to get future RMD’s down? I encountered this situation second-hand that another preparer elected to do, but didn’t have enough of the taxpayer’s whole picture to analyze the overall worthiness of that move, so I’m curious to get your take on it. What benchmarks would you look for to say yay or nay to that approach? Getting RMD’s down to $100K or something else?

    • james on April 2, 2019 at 4:35 pm

      I would suggest to take advantage of the new tax law and do it in a couple of years to easy the tax hit. Use the standard deduction and then withdraw enough until you reach your old tax bracket this way you are paying basically the same as if you had not withdrawn unless you take an additional amount that will raise your bracket and last years AGI considerably.

  10. Social Capitalist on April 3, 2019 at 9:03 am

    Great article. I have about 1/3 of our wealth in my 401k. The rest is in Roths and HSA(1/3), and company stock (I know, I know, but current return is 6% without any price appreciation due to company incentives – hard to beat) Planning to retire at 55 (when I receive pension). I had my wife begin contributing to her 403B this year for the tax deduction, reduced tax bracket and hope that I could put money in a traditional IRA (our incomes exceed $160K combined.) Wondering if 403B/traditional IRA is best plan now as I will have my pension and her pension (combined $5-5.5k/mo.) If I retire and begin withdrawing from 401K early I will still be paying taxes after $24k.

    Retirement income from just the 401k and pensions would still be less than current so it makes sense to continue with 403B plan? Assuming I draw them down for 15 years I should be able to avoid heavy taxation but that still leaves me with too much in company stock after I retire and no good way to draw it down. I guess maybe I should take tax bite on wifey’s money? If anyone cares to provide any insight I would be appreciative.

  11. Keith on April 3, 2019 at 10:28 am

    Really good article Keith. Thank you

    • james on April 3, 2019 at 7:47 pm

      I totally agree with you but then its clear that the capital gains are not tax free but taxed at a lower rate.!

  12. Katie Camel on April 5, 2019 at 3:05 pm

    Wow. This post makes me glad I’ve always focused on maxing my Roth IRA before maxing my 403b or 401k. I had no idea RMDs could yield such high tax rates and was a little frustrated that I can’t tuck more of my savings into my tax advantaged accounts. When I eventually reduce my hours at work, I’ll continue focusing on maxing the Roth IRA and adding at least enough for the 403b match. You’ve given me a lot to think about, but I’m going to have to review this post several times. Thanks!

  13. Vanessa on April 8, 2019 at 2:06 pm

    My husband and I are new to all of this, and he is getting ready to retire, now realizing we are going to be smacked with taxes on his traditional 401k.
    So, we are looking to pay the taxes on small annual rollovers to a ROTH IRA. Are his 401k rollovers classified as LTCG? (How would we report this on our 1040 (we don’t itemize) so that it is not taxed as ordinary income?)
    In 2019, his income will be around $89,000, + I will have an inherited RMD of $2,000 + $6,200 from SS = total 2019 mfj gross income about $97,200.
    We would like to roll over $20,000 each from our pretax retirement accounts, bringing the total to about $137,200, minus $26,600 (mfj standard ded. over 65),
    for a total of $110,600.
    If I am understanding you, does this mean that everything under $78,000 is tax-free, and we would be paying fed. tax on only $32,600?
    Does our plan sound wise to you?
    Are the tax tables for 2020 thru 2023 going to be similar? I am wondering if he should retire next year, working only 2 days a week and taking more than $20,000 out of his 401k while his income is lower and he is still a few years away from collecting Soc. Sec. at age 70.
    Suggestions?
    Thank you!

    • Perkunas on April 13, 2019 at 8:00 am

      “Are his 401k rollovers classified as LTCG? (How would we report this on our 1040 (we don’t itemize) so that it is not taxed as ordinary income?)”

      In general, money that “comes out” of a 401k is either A) not taxed at all (like a rollover from 401k to a *traditional* IRA), or B) taxed as ordinary income. In order to get money from the 401k to a Roth, you have to take a normal distribution (subject to ordinary income tax rates) and then assuming you have earned income you can contribute to a Roth.

      “If I am understanding you, does this mean that everything under $78,000 is tax-free, and we would be paying fed. tax on only $32,600?”

      Unfortunately that is not correct. In your example, basically all $110k of income will be subject to ordinary income tax. (I say “basically” because some small portion of your SS is not subject to income tax but that is likely only ~$1-2k).

  14. Jan on April 8, 2019 at 7:44 pm

    So can you do a post on how we learn all these things to help ourselves. I’m very interested in becoming more savvy when it comes to tax planning and out of the box thinking. It reminds me of researching into my own health and taking responsibility for it. Where do I start? I have the basics, do my own taxes, invest in index funds and I just want to take it to the next level for tax planning going forward.

    • Perkunas on April 13, 2019 at 8:04 am

      Review all the old articles here to see if anything applies to your situation. Do google searches. Consult w a tax pro if necessary.

      Another incredible resource is the Bogleheads forum. They have a wiki with tons of information on personal finance and a very active forum where you can find specific information on both tax and finance.

  15. Vikram on April 12, 2019 at 9:15 am

    Thank you for a great post Keith. I am still fairly young (high 20’s) and have been maxing out my Roth IRA, Traditional 401(k) and HSA for 2 years now.

    This post have given me insight to go back and reevaluate my strategy for the long-run because if I continue to max out my t401(k) for 35+ more years, my RMD will be huge.

    As of now, I believe I have enough pre-tax funds in my t401(k) that I can completely stop contributing and have around $1 million+ in pre-tax money at 70.5. Thus I have changed my strategy to move towards 90%+ Roth 401(k) contributions from here on out in order to now have RMD issues later in life.

    Thank you for your write-up.

  16. Jennifer on April 15, 2019 at 11:11 am

    All very wonderful points!

    When I was a W-2 employee in public accounting, I preferred contributing to the Roth 401k offered by my employer (although none of my fellow co-workers seemed to). I was single, I knew what my income would be, I knew what my expenses would be and it was easy to live without the tax deduction.

    Now that I am married (with a baby on the way) and self-employed, my situation has changed. There are a lot more unknowns in my life now. I’m thinking I’ll have my husband max out his contribution to his Roth 401K and I will open a solo 401k and contribute as much as I can as an employee and as an employer with the idea of not having to pay federal income taxes AND self-employment taxes on all of my income.

    I’m not quite ready to open an S-Corp . I’m also considering investing much of my income back into the business as well, at least to the extent I believe it will be of future benefit to my business.

    Cash in your hand now can be hard to ignore. Like many couples starting out, we definitely feel the pressure to maximize the cash available to us, we are trying to fund house repairs, furniture purchases, vehicles, childcare, etc. All these life events seem to happen at the same time!

    Does anyone feel like they found a sweet spot for married couples or have ideas for creating efficiencies for MFJ, especially one employee and one self employed, who are trying to balance current year tax savings and future years tax savings?

    Many Thanks!

  17. Andy on April 16, 2019 at 10:44 am

    Hey Keith,

    This article right here blows away most of the other FIRE blogs. Most of the other blogs are so vague. I used Vanguard’s estimated RMD tool. Based on our current IRA and 401k balances with 6% growth, in 2046 we would have around $59,000 in RMD’s. If we include social security we’ll go from the 12% tax bracket to the 22% tax bracket. This right here has me thinking of contributing to the 401k to match, maxing our Roth IRA’s first and the rest to the taxable account investing in the tax efficient Total World index fund. Articles like this are awesome! Thank you so much!

  18. foobar on April 16, 2019 at 3:25 pm

    Was this blong entry ment to be an April fools joke? The misunderstandings of the tax code are very common ones that you see repeated all over the net. I can’t believe any professional would make them. On the other hand I can’t see a professional publishing a joke like this either.

  19. kenneth tobin on April 17, 2019 at 8:13 am

    most professionals will have a few million in their ira at retirement, as I do
    its a nice “problem” to have
    partial roth conversions are fine but will not change rmds significantly
    hopefully tax rates will stay this low
    18% effective tax rate on 300k in florida; not too bad

    • Keith Taxguy on April 17, 2019 at 9:50 am

      That is something I didn’t cover, Kenneth, but was fully aware of it. Dealing with state taxes and the very real possibility many people will move to a low or no income tax state when they retire affects the formula. My goal her was to get people thinking a bout the issue. Personal facts and circumstances always rule.

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