The wealthiest investors I have worked with have larger Roths or larger post-taxed accounts than they have in qualified, tax deferred accounts.  The “Tax Time Bomb” is something you hear me talk a lot about at my seminars and on the radio.  We are trained to put as much money as we can away as early as you possibly can into these IRAs, 401ks, 403bs, Thrift Savings Plans, Deferred Compensation, etc. but no one stops to think “who really wins here – the saver or the IRS?”

Let’s talk through a hypothetical example.  Let’s pretend you are a 60-year-old male in good health with a $500,000 IRA all of which are tax deferred dollars.  Let’s also assume you are in or around the 22% Federal tax bracket and because you are wise and lucky you live in Texas so you do not have any State tax.  Let’s also go ahead and presume that you are a super conservative investor and only earning 4% on your $500,000 IRA each year and you never really plan on touching that money unless the IRS mandates you take money out of that account.

Fast forward a decade and that investor is now the proud owner of a $742,715.27 IRA and the IRS says it needs its cut out of that retirement account so you withdrawal only the minimum amount which is around $27,011 and you pay taxes on that withdrawal.  You don’t really need that $21,069.17 (the amount you have left after taxes) so you go ahead and shop some Certificate of Disappoints and find something that will pay you around 2-3% interest per year.

What if this investor just keeps doing the same thing year after year until he passes away at age 90?  Well, that $500,000 IRA from when the investor was 60 turned into around $175,948 in federal taxes from their RMDs, $75,579 from taxes due to their reinvestments, and another $114,201.00 in taxes upon their demise.  Let me do the math for you.  $500,000 just multiplied into $365,728 in taxes.  Whereas, if the IRA owner had looked at being tax proactive with a tax centric fiduciary based advisor, he could have only paid around $110,000 in total tax.

Here’s my disclaimer:  This is complicated and I do not recommend you forging this road by yourself.  If you make mistakes, a Roth conversion is not something that you can get a mulligan on any more like prior to the Trump tax changes.  Roth conversions could also result in a higher Medicare premium.  There are tax strategies that can be applied to lessen the pain, but my hope is that you will be swimming in a pool of tax free dollars at some point in life.