June 21, 2018

Last week we shed light on retirement income and the (slight) tax burden related thereto. Because tax rates start at zero, taxes paid on withdrawals are roughly 8% on the first $60K of income. Tax savings on the ‘traditional’ retirement contribution were taken at ~30%+ rate, which makes for a really good deal. 30%+ saved. 8% paid.

Well, what if we add another $60K to our retirement income, for some well-deserved discretionary spending. We double the withdrawal to $120K, and find again that as our income rises, so do tax rates.  

Seems the tax take on the 2nd $60K is 24% (vs 8% on the 1st $60K) and the tax rate
on the last dollar is back to the 30%+ rate we paid while working. Taxes are getting our attention …again!

At this level, tax free income satisfies our retirement goal to keep the tax man in check. Luckily the Roth 401K set up years ago, anticipating higher levels of spending in our golden years, is just the ticket.
We smile. We win.

Conclusion: Do both! Prioritize the traditional, for basic expenses (soap), over the Roth, for discretionary spending (MaiTai’s). Have a different investment strategy for each, e.g., more conservative for the traditional; more aggressive investments for the Roth. How much?

  – Wing-it:  If you’ve been contributing your 401k for 4-5 years, start with a 1-2% contribution to the Roth 401K.
  – Analyze it:  Use a spreadsheet or a slide rule to project values and target ending values 2/3’s Traditional / 1/3 Roth.

The Delta Group employs the magic of spreadsheets to draw a portrait of future based upon wages, savings and estimated growth rates of retirement accounts. Better way to make decisions.

Give a shout-out to Eric @ 415.640.6770 to get your questions answered regarding your personal situation and to discover if an analysis would be helpful.

If you haven’t already read last week’s post “To Roth or Not to Roth.”