Threading a Financial Needle
There are two completely contradictory forces at work in the world of tax-deferred qualified retirement plans (401k, IRA, etc).
The two key success criteria for a qualified plan are:
1) Grow as big of an account as possible and
2) Defer the tax to a time when you’ll be in a lower tax bracket
But there is a third factor, often-ignored or unknown by many, that causes the first two to work against one another.
Required Minimum Distributions (RMDs). RMDs require you to withdraw a certain minimum percentage from your account every year, whether you want to or not. So, if you’ve done a good job with #1 and created a big retirement account, the required minimum withdrawal amount can put you right into the highest tax bracket.
This perceived benefit of tax-deferral ends up being a situation where we must thread a financial needle – create as big of a retirement account as we can - but not too big! Defer tax until such time that we are in a lower tax bracket - but maybe not!
By the way, this is the crazy game you play even if taxes stay the same in the future. Does anyone actually think taxes will be lower in 20, 30 years?
You can watch my video on tax-deferral nonsense here: