A lot people who are maxing out their 401k plan each year think this is a smart choice because they are making tax-deferred contributions. But what they are not realizing is that even if that saves them a few thousand dollars each year during the contribution phase, it doesn’t offset the huge tax consequence that they end up paying each year on the withdrawals, because people are taxed at their highest tax bracket in retirement.
Just look at the example below of an individual in the 25% tax bracket who contributes $10,000 annually for 15 years into a tax-deferred asset like 401(k) or IRA with a 7% net annual growth rate. They save $37,500 in taxes during the accumulation phase, but end up paying a whopping $151,890 during the withdrawal phase.
This hypothetical example does not consider every product or feature of tax-deferred accounts and is for illustrative purposes only. It should not be deemed a representation of past or future results, and is no guarantee of return or future performance. This information is not intended to provide tax, legal or investment advice. Be sure to speak with qualified professionals before making any decisions about your personal situation.
I have a solution that does the reverse!
Imagine paying the taxes in the contributions phase. (Last circle in the first row: $ 37,500, or $2,500 per year for the first 15 years.)
And avoiding the hefty taxation in the withdrawal phase. (Last circle in row 2: $ 151,890, or $5,063 per year for 30 years!)
If you have questions about how this works, or would like to explore whether this strategy might be effective in your circumstances, feel free to access my online schedule and set a convenient time to have your questions answered!