The 401k may lose its tax luster

If you save via a traditional 401k or IRA, think about this.

You get a tax break by saving on a pre-tax basis, but later you pay taxes on your contributions, any employer match and on earnings … that’s ordinary income taxes, not capital gains.

You save on taxes while you’re working and the IRS gets back what lost revenue occurred during those years.

Hey, I’m putting the money in, what do I know about investing?

Once you are retired, the theory says you will be in a lower tax bracket. But will you?

Look at what is happening to the federal (and many state) budgets. Higher deficits, higher debt, greater borrowing.

It all adds up to one thing; higher taxes‼️

Soooo, does it still make sense to save on a pre-tax basis?

You may want to consider saving in a Roth IRA, Roth 401k if available or after-tax 401k savings.


  1. Some items to consider include:
    • A worker is not likely to experience the same income tax rates throughout his or her period of employment and retirement,
    • Pre-tax savings usually avoid taxes at the top marginal rate; but retirement payouts are often taxed at effective (average) rates, and
    • State income tax rates may vary – when comparing state income taxes while employed and in retirement, or where the state of residence while employed differs from the state a worker chooses in retirement.

    So, pay attention to timing. Keep in mind that the average federal income tax rate, here using 2017 data (total income tax minus refundable credits as a percentage of AGI), suggests that our effective, average rate for most retirees is, at least currently, very modest:
    – 9% – AGI under $10,000
    -11% – AGI of $10,000 – $20,000
    – 2% – AGI of $20,000 – $30,000
    4% – AGI of $30,000 – $50,000
    9% – AGI of $50,000 – $100,000
    13% – AGI of $100,000 – $200,000

    Because of exclusions, etc., 44% of American households (tax units) pay NO federal income tax.

    What can you do:
    Roth IRAs turned 22 years old this year. Roth was a response to the constant tension between retirement savings needs and our federal government’s budget and revenue needs. IRAs were first added by the Employee Retirement Income Security Act of 1974 for those who were not eligible for an employer-sponsored plan. The Economic Recovery Tax Act of 1981 allowed, starting in 1982, for a tax deduction for a contribution to an IRA equal to the lesser of $2,000 or 100% of compensation included in gross income – regardless of whether the individual was an active participant in an employer-sponsored retirement plan. The Tax Reform Act of 1986 for taxable years after December 31, 1986, to limit the tax deduction for contributions to an IRA where a worker was an active participant in an employer-sponsored retirement plan to those with an income below $25,000 ($40,000 if married, filing jointly). If you were covered under an employer-sponsored retirement plan and had income above those threshold amounts, you could make a contribution on an after-tax, non-deductible basis. The result, contributions to IRAs declined 63% – from $37.8B to $14.1B! The Taxpayer Relief Act of 1997 raised the income limits for a tax deduction to $30,000 (single) and $50,000 (married filing jointly) in 1998, with scheduled increases in subsequent years. TRA’97 also introduced the Roth IRA, which was first available in taxable years after December 31, 1997. Roth IRA contributions are after-tax, earnings accumulate tax deferred, and assets are distributed tax free when distributed after the later of five years from the establishment of the Roth IRA or age 59 ½. Mandatory distribution rules do not apply to Roth IRA monies until the account owner’s death.

    For some workers, Roth IS better than pre-tax or tax-deductible contributions! But, there are too many variables to assert Roth is always better. And, we know that Congress may someday change the rules.

    Most employer-sponsored plans offer access to contributions on a Roth basis. However, while an ever-increasing number of plans use automatic features, only a small number automatically enroll workers using Roth.

    A modest percentage of plans offer “in-plan” Roth conversion provisions – added in the last ten years or so – so workers can time conversion to Roth.

    Oftentimes, the participant controls the timing and amount of distributions – with the exception of certain in-service and Required Minimum Distributions. That may enable the participant to avoid the top marginal tax rates, and state income taxes as well.

    Bottom line, most participants have plenty of options to manage taxes.


  2. Retired early this year at 53 thanks to a three decade career in public education. Saved well during my career in a 403(b) 80% and Roth IRA 20%. Will continue to save in an after tax account in retirement through age 72 and take RMDs. Unfortunately, will not have access to Roth as no earned income. If I do have an earned income, all will go into a Roth IRA or Roth 401(k). Agree with the post that things are shaping up for high taxes in the future so all pre-tax investments are finished for me.


  3. Not using a Roth was our biggest investment mistake. Thirty years ago who would have guessed our tax bracket in retirement would exceed what we paid while working,


  4. You make some very good observations on trying to guess where your tax liability will be 40 years later. Here is my take on it.
    Very few of us get their first job out of high school as vice president of the company. In my case, Roth IRAs and online commission free trading were not available. You will always have to pay taxes. If you are not paying taxes, you probably are not earning enough to live on. Most of us got married in our 20’s and have children.
    Hindsight is always nice to see what I should have done from the perspective of the wages I was making when I retired. Guessing where I would be while making minimum wage is another story.
    If I started out as VP, I would have used the Roth IRA but since I had barely any any money leftover trying to feed my children, the 401K was the right thing to do. I was basically putting money into the 401K instead of paying it to Uncle Sam so I basically saw very little difference in my take home pay. It was the only way I could save for retirement.
    When I realized that I might make more in retirement than working I got upset about the taxes, after all I was told that I only need and I should only expect to have about 60% of my pre-retirement income. Well, I’ll be close to 100% with social security and over 100% if I delay getting the benefit.
    In the end, I have decided that paying taxes is a good problem to have. I wouldn’t worry about paying the taxes. I would worry about not having enough money in retirement not to pay the taxes.


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