Pre-tax accounts can be tricky to deal with once they get large enough.
This is a client case study of a W2 high earner that works for a NASDAQ large cap
($200k/yr base salary + ~$150k/yr in RSUs).
Case study facts:
Age: 53
Total pre-tax: $1.5M
Total after-tax (roth): $345k
Total investable assets today: $1.9M
Her project roth balance at age 95, following my plan: $2.31M
There are two key components of what I did:
Save her as much money as possible on tax, with strategy on roth conversion
Make her as much money as possible while accounting for her change in risk tolerance in retirement. I did this by rebalancing her portfolio.
Roth Component
For some retirees, if the pre-tax accounts get large enough and they’re invested in high growth tech for example, it actually makes more sense to start conversions while still working and convert into a higher bracket (with W2 salary on top). I have an upcoming case study where this is the case. This effectively saves them more in lifetime taxes.
For my client here, her balances is still okay. She will start conversions at 57.
The general plan is:
53-57 —> keep working
57-58 —> retire, convert 125k/year to after-tax, live off of brokerage account
59 —> convert at 35k a year, live off of brokerage account
60-66 —> no conversions, live off of 401k
67-74 —> social security starts at 67, convert 15k/year and live off of 401k
75+ —> RMD’s will never put her past 22% tax bracket
With my plan, she never needs to convert past the 22% federal tax bracket 🙂
Here’s what we’re doing with her portfolio
💡 I simplified her holdings from her 401k. There were lots of target date funds in there, which I shifted into low cost indices that give her international coverage, US small/mid cap coverage, and S&P500 coverage.
💡 I created a $500k municipal bond (interest is tax free) and money market safety net which is intentionally conservative to match her retirement needs. This allows her to draw from here if markets have a downturn. It’s okay to hold cash when you are retired.
This is a visual of how her money moves strategically, in the most tax-efficient manner, out of pre-tax accounts.
The result that comes from working with me:
⭐️ She pays about $330,000 less in lifetime taxes
⭐️ Her RMD’s at 75 cut from about $90K to $53K a year
⭐️ She can retire at 57 with peace of mind knowing that she can sustain herself on $8,400 a month, after-tax. (She could spend more if she wanted to by withdrawing money out of the Roth)
⭐️ She will leave about $2.3M in her Roth by 95. This will be tax-free for her estate and her beneficiaries.
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