An Educator’s Perspective
For many Gen X and Gen Y educators, the mantra early in your career was simple: defer taxes now, pay them later. Roth options may not have been available or as widely used when you started—Roth IRAs only appeared in 1998, and Roth 401(k)/403(b) plans in 2006. So you diligently maxed out every tax-deferred bucket available (401k, 403b, 457b, IRA).
Fast forward: you’re now in your early-40s to late-50s, with $1.5–$3 million saved in tax-deferred accounts. With another 15–30 years until required minimum distributions (RMDs) begin, that nest egg could grow to $6–$18 million by age 75 (the current RMD starting date for Gen X & Y).
The challenge: while future tax brackets are unknown, it’s reasonable to assume that RMDs combined with Social Security income could push you into the top bracket. If married, joint filing may soften the impact. But if single or widowed, more of your income could be taxed at the highest rates.
The Key Question
Have you already accumulated enough in tax-deferred accounts that it’s time to shift focus toward tax-free savings?
For many teachers, retirement years don’t offer much room for Roth conversions at lower tax rates. That makes switching to Roth contributions now worth serious consideration.
At Clear Skies Planning & Wealth, our answer is yes. Building balance means diversifying not only your investments but also your tax exposure. Saving into Roth accounts (Roth 401k, Roth 403b, Roth IRA) may mean paying more taxes today, but it positions you for greater flexibility and potentially lower lifetime tax costs.
Our Philosophy
As advisors, our goal isn’t just to minimize taxes in the present year—it’s to strategically minimize taxes across your lifetime. That requires assumptions about future income, tax rates, and investment growth. No one has a perfect crystal ball, but just as investors diversify to manage uncertainty, tax diversification is equally important.
Case Studies
Example 1: Charles & Charlee Mathematician
- Ages: 55
- Current tax-deferred assets: $2.5 million
- Assumed growth: 8% annually
- Value at age 75: $11.6 million
- First RMD: $473,000+
On its own, this RMD doesn’t reach today’s 35% bracket. But add Social Security and taxable brokerage income, and they’re likely pushed into higher brackets, especially if one spouse passes away.
Example 2: Sally Statistic
- Age: 50
- Current tax-deferred assets: $2 million
- Assumed growth: 8% annually
- Value at age 75: $13.7 million
- First RMD: $557,000
As a single filer, Sally’s RMD alone places her in today’s top bracket, before accounting for Social Security or other taxable income.
Philosophical Thoughts
Tax rates today remain near historic lows. For perspective:
- 1944–45 saw the highest US tax bracket in history at 94% due to wartime financing
- The 1960 top bracket was 91%
- The average top bracket since 1960 is 55%
We’re not here to predict whether tax rates will rise or fall. Instead, we highlight the opportunity today’s lower brackets provide: funding Roth accounts at relatively modest tax rates, and considering Roth conversions while rates remain favorable.
Final Word
Our role as advisors is to help you see opportunities, whether in markets or in tax strategy, and tailor them to your unique situation. For many educators, shifting from “tax-deferred only” to a balanced mix that includes tax-free savings is a powerful step toward long-term financial security. If you would like Clear Skies Planning & Wealth help you navigate the decisions surrounding your retirement, please schedule a call.
David Brown was the Chief Financial Officer/Business Administrator at Blanchard Memorial School, Groton School, Alexander Dawson School, Rippowam Cisqua School, and Portsmouth Abbey & School over a 23-year school career. During that time, he advised and/or helped heads and administrators assemble and negotiate benefit packages that would ensure a comfortable life through “end of plan”. For over 10-years Dave has helped his clients effectively plan, save, and invest to and spend appropriately through retirement.
For personalized financial planning and/or investment guidance, contact Clear Skies Planning & Wealth Strategies at www.clearskieswealthplanning.com or directly at 720-833-8611.
Clear Skies Planning & Wealth Strategies, Inc provides advisory services through XY Investment Solutions, LLC, an SEC registered investment advisor. All views included in this communication are subject to change. Please contact Clear Skies Planning & Wealth Strategies to receive a copy of our Form ADV and other disclosure information.