A quick note: I’m taking a holiday break, so there won’t be a new article next week. Wishing you all a wonderful holiday season and a happy new year, and thank you for being part of our community!
Today’s article was inspired by recent online discussions and an article I came across during open enrollment season. They all made the same mistake when discussing retirement account contributions – overlooking the household’s existing retirement account balances. It’s a crucial point that’s often missed, and it’s essential to consider when making decisions about your retirement savings strategy.
While current income level is an important factor, it’s not the only consideration. We need to look at the bigger picture, including your overall financial situation and retirement goals.
Let’s consider an example: Meet Beth and Brian, a married couple filing jointly, in the 24% tax bracket, with most of their income coming from W-2 wages. They’re similar to Tim and Tiffany, another married couple in the same tax bracket, with identical income and deductions.
However, there’s a significant difference: Beth and Brian are 60, having maxed out their tax-deferred accounts for 30 years, with a mostly-stock allocation, resulting in a substantial $3.5 million in tax-deferred accounts. In contrast, Tim and Tiffany, aged 35, have been making Roth 401(k) and Roth IRA contributions throughout their careers, accumulating considerable Roth savings and no tax-deferred accounts.
Both couples are in the 24% bracket, so they’d receive the same tax savings from making deductible 401(k) contributions. However, Beth and Brian’s large tax-deferred balance means they’ll have significant taxable income in retirement, making Roth savings more appealing. On the other hand, Tim and Tiffany, with their Roth-only approach, will have minimal taxable income in retirement, making it sensible to start making tax-deferred contributions to utilize their low tax brackets.
When deciding between Roth and tax-deferred accounts, consider the marginal impact. Ask yourself: what tax rate will you pay on these dollars and their associated growth when they’re withdrawn? Generally, the more you have in tax-deferred accounts (and, to a lesser extent, taxable accounts), the higher that tax rate will be, making Roth contributions more attractive.
What is the Best Age to Claim Social Security?
Read the answers to this question and several other Social Security topics in my latest book:
 |
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less |
Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Michael Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Michael Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Michael Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. The information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.
You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).
