Conventional wisdom suggests you should save everything you can in tax-deferred retirement accounts to minimize taxes in the current year and benefit from tax-sheltered growth. For many, that may still be good advice. Certainly, you should be saving everything you can for retirement. However, for high earners who save a lot, saving in tax-deferred accounts may prove to be bad advice. Why?
This article is part one of a seven-part series. Today’s article provides an overview of the issues and potential solutions.
Snowballing Required Minimum Distributions
Tax-deferred savings have an associated tax liability that you will have to pay someday. The IRS will only let you avoid taxes for so long. Withdrawals from tax-deferred accounts are taxed as ordinary income. You may take withdrawals without penalty from tax-deferred accounts starting at age 59½, but many investors wait to make withdrawals until they are required to take required minimum distributions (RMDs) at age 72.
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