Tag: tax deferral

Tax-deferred accounts avoid annual tax payments during our working years. Workers who defer taxes in accounts like 401(k)s accelerate growth for many years. However, distributions of retirement income from these accounts usually contribute to a retiree’s ordinary income for that year. So, these distributions are taxed much like wages are during our working years. This recent article in the WSJ highlighted that there are reasons to think more strategically about continuing to defer taxes in retirement.

“To be sure, the idea of accelerating income violates the first rule of traditional tax planning, which is to defer taxes whenever possible. But there are reasons to rethink this rule now. “

Laura Saunders, 31 January 2025, “When Paying More Tax, Not Less, Is the Smart Play“

We couldn’t agree more! In fact, we made this and other salient points in our award-winning article entitled “Seeking tax alpha in retirement income“. We supported our observations and conclusions through rigorous mathematical modeling of tax laws most relevant to retirees in the U.S.A.

In this post, we highlight this recent news article. We then provide a suggestion on how an individual or financial advisor may improve their retirement income strategy.

Time horizon

A key flaw in deferring taxes is that many retirees need to look at a longer time horizon. Currently, a 65-year-old male retiree can expect to live another 18 years. Similarly, a 65-year-old female retiree can expect to live to 21 years more. So, unless a retiree has some known terminal illness or other significant health issue reducing their life expectancy, tax-efficiency in retirement can take advantage of this time horizon.

Termed “stealth” taxes, tax-deferred account typically force retirees to begin taking requried minimum distributions (RMDs) at age 73. These distributions only grow, as a percent of a tax-deferreed account value, due to a shorter life expectancy for each year a retiree ages. Along with other factors, like the widows-penalty when a surviving spouse files their tax returns as a single, net-investment income tax, and income-related premiums for Medicare, these RMDs can be tax inefficient.

When you may not want to defer taxes

Unfortunatley, there is no single decision that a retiree can make to maximize their tax efficiency. But, for retirees with significant assets in tax-deferred accounts, the algorithms in our article “Seeking Tax Alpha in Retirement Income” are available online. We encourage you or your financial advisor to try our free online calculator. With it, you can see the amount of tax efficiency potentially available by accelerating tax-deferred distributions and avoiding RMDs.