Are you optimizing for the wrong tax planning goal? As we show in this video, planning for a tax-free retirement can cost you far more than most realize. You can schedule an appointment with one of our Retirement Experts to review your situation and help you plan for your future. Call us at (920) 544-0576 or go to
Timestamps:
0:00 Why You Shouldn’t Want a Tax-Free Retirement
0:17 What it Takes To Have a Tax-Free Retirement
2:03 What Should Your Tax Planning Goal Be?
3:33 Important Variable in the U.S. Tax System
6:05 Managing Taxes Each Year While Working
7:57 Case Study: A Tax-Free Retirement Costs Nearly $700,000
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As we approach retirement age, many of us dream of the day when we can finally kick back and enjoy the fruits of our labor. And for some, that dream includes the idea of a tax-free retirement, where they can live off their savings without having to worry about Uncle Sam taking a chunk out of their income.
But the truth is, aiming for a tax-free retirement may not be the best financial strategy in the long run. There are several reasons why you shouldn’t prioritize or solely rely on achieving a tax-free retirement:
1. Lack of diversification: Relying solely on tax-free accounts such as Roth IRAs can limit your options for managing your retirement income. Having a mix of taxable and tax-deferred accounts can provide flexibility in how you withdraw funds and potentially reduce your tax burden in retirement.
2. Tax laws can change: While tax-free accounts like Roth IRAs are a great way to save for retirement, there is no guarantee that current tax laws will remain the same in the future. By diversifying your retirement savings across different types of accounts, you can hedge against potential changes to tax policies.
3. More savings needed: In order to achieve a tax-free retirement, you may need to save more money than if you were planning on paying taxes on your withdrawals. This can be a challenge for many individuals, especially those who are closer to retirement age and may not have as much time to save.
4. Limited access to funds: With tax-free retirement accounts, there are restrictions on when and how you can access your funds without penalties. By having a mix of taxable and tax-advantaged accounts, you can have more flexibility in managing your income in retirement.
5. Tax diversification: Having a mix of taxable and tax-advantaged accounts can provide tax diversification, allowing you to strategically manage your income in retirement to minimize taxes and potentially save money in the long run.
Ultimately, aiming for a tax-free retirement may not be the best strategy for everyone. It’s important to consider your own financial situation, goals, and risk tolerance when planning for retirement. By diversifying your savings across different types of accounts, you can create a more flexible and potentially more tax-efficient retirement income plan. Consulting with a financial advisor can also help you create a personalized retirement strategy that takes into account your individual needs and goals.
I’m in my mid 20s contributing Roth all the way at 22% at what age would you recommend starting up a Pre-Tax account to have enough in that bucket?
Just wait until 70%,80%,90% tax rates come as 100 trillion plus of unfunded liabilities come due… taxes over time going up.
I just want to have a low tax retirement
With an HI of only $60k my wife and I will manage to max out our Roth accounts this year and still have some extra money for retirement savings. At age 33, we are a long way from retirement age so my question is what is the next best place to put that money for tax efficiency? I belive my wife does qualify for an HSA so considering that as an option.
Best time to do Roth conversions is in a down market or with investments that are at a low point with a compelling belief they are under-valued and will rebound. Convert more at much lower cost in terms of taxes and get all future capital gains tax-free. Also hedging against future increases in capital gans tax rates. Plus wage tax cuts from TCJA end December 2025. After expiration the rates increase by 3-4% for each income group. That may not sound like much but it is $3,000 per $100K in income. Better to convert now as long as it doesnt drive you up into next tax bracket.
I am in the same tax bracket whether i do everything roth or pre-tax. Same percentage. And even if i managed to somehow drop to a lower tax bracket, it is only a few percent. But with roth, i will avoid minimum required distribution and having to plan rollovers in the future.
However, with pre-tax i could potentially pay less tax on just that saved money in the future.
Food for thought.
Alwaya Roth when you can. The money is taking out regardless. Its all about do you wanna pay now or later? Pay now, and your gains are not eaten in the future. Pay later and your on YT for days, or hiring a specialist to figure out your conversions. So you wont screw up your SS, medicare, and over pay on taxes.
Great video! Spot on! One more reason not to convert 100% to a tax-free account is if one is inclined to donate money to charities. Qualified Charitable Donations (QCDs) are a great way to do this if you are over 70 1/2. You are able to move that money directly from your tax deferred bucket to the charity and not pay taxes or RMDs on that money. Paying taxes on the money via conversions, getting to 100% tax-free and then donating the tax-free money to the charity does not make good financial sense. You point that out very well in your other videos. Keep it up!
Your scenario of everything being the same after 20 years is only true if the govt doesn't change tax policy. You shouldn't trust the govt so much. lol
In 20 years, the tax rates are going to be astronomical. There is no way that taxes are not going to go up significantly.
Pay taxes now. Not later.
Great thesis. It does not consider the drawbacks of future higher marginal tax rates beginning in 2026.
Convert to the standard deduction, then tap into lt cap gains and harvest gains to the ltcg limit. Ezpz
YOU COMPLETELY IGNORE THE MANY YEARS OF GROWTH THAIS TAX FREE – – THATS THE REAL BENEFIT TO PAING THE THAWHILE WORKING – EVEN IF HIGH AND CONTRUBUTE TO ROTH NOT PRETAX
Safeguard Wealth: Calls Roth "tax free"
Also Safeguard Wealth: Proves that gains in a Roth aren't tax free because it doesn't matter whether you tax the investment before or after the gains. As long as the tax rate is the same, the gains are taxed by the opportunity cost of having less initial investment
The Roth isn't "tax free" it's "taxes paid". Just a small pet peeve of mine- I definitely believe Roth has a place in most retirement plans.
One element that I did not see factored into this video is the federal standard deduction. A downside of a 100% tax-free retirement is that you don't get to take advantage of the annual standard deduction.
Thanks for doing a review of this. I am exactly in that state now. Keep up the good work.
heck yeah. I retired last yr under Rule 55, all my money is in Roth and taxable accounts. Once i reach 65, I appear to be "broke on paper" in regards to IRMAA and will be in the lowest bracket for medicare.
It's like knowing when to take social security. The only way to nail it perfectly is to know the future.
Everybody's situation is different. If you are interested in the other side of the argument, search YT for "The Power of Zero" (David McNight). David believes that tax rates will be much, much higher in the future (to address our insane national debt), which makes tax free slow go years much more attractive. Additionally, this video does not mention that Roth IRAs have several advantages to your heirs.
How does the value of the dollar affect these calculations? For example, if one pays tax now at 15% with current value dollars or pays the 15% 20 years later with dollars worth .75 of current value, would they actually be paying less?
A reminder for those targeting the 12% bracket which will likely be the 15% bracket in 2026. If you are collecting social security in that year, you are effectively paying a higher tax rate as you may be causing non-taxable social security to become up to 85% taxable. In other words, converting to Roth at 22-24% rates before collecting social security is roughly the same as 185% of 12-15% while collecting social security later in life.
Planning retirement since age 35, now 61.
Roth came into existence in 1998. Back then you could only put 2,000 in till about 2004 when they started raising the limits. Wife and I maxed out these accounts from day 1. Then will we both started maxing out Roth 401k in 2009 when that became an option. Retired in 2022, have 70% in Roth today and 30% pretax. Only made one conversion during our accumulation and made an average of 120,000 to 150,000 in wages over the years.
The plan now is to spend most or all pretax till 70 and then take SS. If any pretax left it will go towards charitable giving. Then only SS and Roth accounts, the taxes will behind us and our children’s inheritance 10 years out.
Eric, it would be interesting to hear some thoughts on intergenerational tax planning strategies.
I do not object to taxes. I understand the need. However, recently the US paid for the bridge that was destroyed by a ship. The owner of the ship should have paid that bill. If that causes a bankruptcy, so be it. They were not doing a good job anyway.
Agree that you shouldn't be hell bent on doing roth conversions but you should lean towards them because:
1. Behaviorally you want to get the tax pain over with.
2. It's easier to pay an equal amount when you're making income than not.
3. If you want to use the money before 59.
I find myself always agreeing with Eric…but (maybe not this time) the reality is everyone will miss the optimum conversion strategy because we don’t know the future. Annual investment returns, future tax rates, future taxability of SS income/passive income, life expectancy of each spouse…to name just a few. So, the optimal model can be created and modified annually and ultimately will still miss the mark when our lives are over and taxes are paid by heirs. I would rather convert too much early on at the favorable tax brackets through 2025 with a model that shows I can afford those bargain tax rates; instead of converting less and then finding out that some factors changed and now my widow or I am forced to pay loads more in taxes that we can’t afford later. Converting at 24% or 22% was the sweet spot that I was willing to gamble on. As with investment risk tolerance, I view my Roth Conversion strategy as something I chose to be able to sleep better at night.