First, let’s clear up the misconception about a ROTH 401(k) Contribution.

NO MATTER HOW MUCH MONEY YOU MAKE, YOU CAN CONTRIBUTE TO A ROTH 401(k) in your employer-sponsored plan (assuming they offer the choice).

I get asked repeatedly why I would want to pay taxes on my 401(K) or other employer-sponsored retirement contributions now.

The answer is simple math.

  • You are 40 years old. 
  • In your company 401(k) retirement plan, you have contributed $100,000 Pre-Tax over the last ten years.
  • The effective tax rate for you over those ten years was 20%
  • You saved $20,000 in taxes on your pretax 401(k) contributions.
  • After ten years, with an assumed % growth rate of 8%, your 401(k) balance is approximately $150,000.

CONGRATS – you are on the way to creating a LARGE TAX problem for yourself and your heirs when you retire.


Let’s continue our math problem!

You have done so well in ten years you decided to stop making 401(k) contributions.  We will continue to assume that your 401(k) will grow at an 8% annual rate until you retire at age 70.  The balance of your 401(k) would be approximately:

  • Age 50 – $337,775
  • Age 60 – $729,229
  • Age 70 – $1,574,350

Onward to distributing your retirement account to you, a spouse, or a beneficiary.

Taxes must be paid. 

The “myth” is that my taxes will be lower when I retire.  Not always, and with the change introduced in the SECURE ACT 2.0 that eliminated the “Stretch IRA” for non-spouse beneficiaries, I would say it is possible that whoever gets the money will pay more taxes.

Let’s stick with our math problem.

We will use the same 20% effective tax rate to be paid by either you, your spousal beneficiary, or your final beneficiaries.

  • Total Account Value = $1,574,350
  • Tax Rate = 20%
  • Total Taxes Paid over the life of the distributions = $314,870

Would you rather pay $20,000 or $314,870 in income tax?

What would you choose?

One of the ways we help our clients is by working hard to provide tax-smart investment strategies to minimize the impact Uncle Sam can have on your bottom line. We are also responsible for educating you about things that could affect your financial future.

Please call us if you have any questions about your taxes or how tax-efficient planning can help reduce your tax burden. We always recommend that you speak with a qualified tax professional who can advise you on the specifics of your personal tax situation.

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