Should You Halt Pre-Tax Retirement Contributions? - Ep #82

Welcome to episode 82 of the One for the Money podcast. This episode airs in March which means we are in the midst of tax season and there are numerous ways to reduce taxes. One of those ways is to make pre-tax contributions to your 401k or IRA. You don’t pay taxes now but will pay taxes later in retirement when you withdraw these funds. But in this episode, I’ll share a perspective that argues that certain high earners should halt pre-tax 401k and IRA contributions.

In the tips, tricks, and strategies portion, I will share tax savings tips utilizing a trust.

In this episode...

• 401(k) Contribution & Tax Efficiency [1:20]
• Higher Earners & Pre-Tax Contributions [2:47]
• Beneficiary Impact [6:59]
• Tax Mitigation Strategies [9:09]

In the episode before this one, I shared that saving in a 401k is a great way to ensure you have sufficient income in retirement and a 401k can allow you to do it in an incredibly tax-efficient manner. With a traditional 401k or IRA, you can contribute funds on a pre-tax basis, this is also known as a traditional 401k or IRA. This will lower your taxable income for the year of the contributions. You will pay taxes later when you take distributions from the account in retirement.

And recently Congress passed legislation to help certain individuals save even more. Those are individuals that are between the ages of 60-63 who can now contribute an additional $3750 to their 401k accounts. For those under 50 they can put away in a 401k up to $23,500, and those between 50-59 and 64 and older put away up to $31,000 but retirees between ages 60-63 will be able to contribute up to $34,750 in 2025. Why those specific ages, 60-63, and not 65 or 67, well you’d have to ask Congress.

While this may seem like something one should take advantage of, Ed Slott, a well-recognized tax and retirement expert has argued that certain higher earners should stop funding pre-tax 401ks and IRAS altogether.

Now Ed Slott is a certified public accountant and is a nationally recognized IRA and retirement planning distribution expert, best-selling author, professional speaker, and television personality. So he’s no crackpot. He has even hosted several public television programs, including his latest, Retire Safe & Secure! with Ed Slott which was featured on PBS.

But the key is understanding the specific people that Ed Slott argues should stop contributing to their pre-tax IRAs and 401ks. Specifically, it is for people who have very large pre-tax 401k and/or IRA balances that should stop because the income forced out of these plans in retirement, via required minimum distributions, will result in them possibly being in even higher tax brackets than they are now.

This highlights an issue that I see countless times in my own financial planning practice which is that far too often tax saving strategies can be very short-sighted. The focus often is on how to get a larger refund in the current year and not considering the ticking tax time bombs that we may be setting ourselves up for in the future. The absolute best tax mitigation strategies consider both short-term and long-term implications when it comes to lowering your lifetime tax bill.

The reason why high earners with large 401ks and IRAs should consider stopping funding is that when they reach the required minimum distribution age, they may have to take some significantly high distributions. People would be amazed by how many of the retirees I work with don’t want these distributions. And my financial practice isn’t alone. There are a number of advisors who work with individuals who don’t want the funds from their IRAs.

I’ll share a hypothetical example to give you an idea. Let’s say you have a large pre-tax retirement account at age 60 with a balance of ~$2 million and it grows at a relatively modest 7% until...