Building up a substantial amount of savings in your 401(k) or IRA may serve as an indicator for a job well done in saving for retirement.
But what soon-to-be retirees need to realize is that if the majority of your retirement savings is in pre-tax dollars, taxes will eventually be owed while in retirement and taking distributions.

Depending on your tax situation in retirement and the tax laws in place at that time, these large account balances may cause a tornado of taxation that you weren’t expecting - which can cause you to have to rethink your retirement strategy altogether.

In this episode, Cameron discusses why pre-retirees should reconsider building up their pre-tax retirement account balances, and what to do instead.

More specifically, we discuss:

• The potential tax problem Cameron has seen recently when talking with those age 50+
• The “shadow taxes” that await you in retirement
• The potential tax ramifications of building up large pre-tax IRA and 401(k) balances
• Alternatives to saving money on a pre-tax basis
• Why tax rates are likely to be higher in the future
• Roth conversions
• How to mitigate or avoid estimated tax penalties when implementing Roth conversions

Resources:

• Access Episode Show Notes and Sign Up for the Retired·ish Newsletter
• Ask Cameron A Question!

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

(01:58) Those age 50 and over should slow down building up pre-tax 401(k) and IRA.

(06:01) Roth 401(k) employer match/profit sharing is taxable; 401(k) plan document dependent.

(07:48) Tax deduction today, or in retirement? Time Value of Money concept isn’t always what it seems.

(10:13) Consider choosing Roth IRA/401K over traditional savings moving forward.

(15:09) Optimize tax strategies with underutilized brackets.

(16:22) Potential tax changes could affect inheritance complexities.

(18:27) How to pay for taxes due from a Roth conversion and avoid underpayment penalties.