Retirement Questions · Hypothetical case study
Could Paying a Little More in Taxes Help You Keep More in Retirement?
A higher lifetime tax bill can still leave more retirement savings after taxes. Michael Thompson’s hypothetical case shows the tradeoff.
The Question
Yes. A strategy with slightly higher lifetime taxes may still leave more retirement savings after taxes. Most people want to pay less in taxes. But what if paying a little more over your lifetime could leave you with more retirement savings after taxes?
The lowest tax bill is not always the same as the best retirement outcome. The amount you keep after taxes matters, too.
Meet Michael
Michael is 63 and plans to retire at 66. He has $700,000 saved: $450,000 in traditional retirement accounts, $175,000 in taxable savings, and $75,000 in Roth accounts. He expects to begin Social Security at 67, receiving $2,500 a month. His goal is to spend $55,000 a year after taxes, with spending rising over time.
Michael wants to know whether changing how he uses his retirement accounts could improve his financial future.
What SageonRQ Found
SageonRQ compared Michael’s Current Plan with a Modeled Plan that included $405,675 in Roth conversions over the projection. A Roth conversion moves money from a traditional retirement account to a Roth account and generally creates taxable income that year. The modeled outcome shows a higher after-tax ending value, fewer required minimum distributions, and more money in Roth accounts. Net-of-tax ending value means the projected amount left after accounting for taxes embedded in ending savings.
| Measure | Current | Modeled | Difference |
|---|---|---|---|
| Net-of-Tax Ending Value | $771,215 | $879,301 | +$108,086 |
| Projected lifetime federal taxes | $120,116 | $121,048 | +$932 |
| Lifetime RMDs | $108,966 | $7,264 | −$101,702 |
| Ending Roth savings | $426,017 | $879,301 | +$453,284 |
| Roth share of ending value | 55.2% | 100% | +44.8 percentage points |
Why Would Michael Pay More in Taxes?
The Modeled Plan projects $932 more in lifetime federal taxes. But it also projects $108,086 more in after-tax savings at age 90. That is about 14% more than his Current Plan.
This does not mean that paying more tax is always better. It means Michael should judge the whole retirement result, not just one tax number.
More Choice Over Future Withdrawals
Michael’s projected lifetime required minimum distributions (RMDs) fall by $101,702. RMDs are withdrawals required from certain retirement accounts. His Roth balance also grows to $879,301. Under current rules, qualified Roth withdrawals generally do not add to federal taxable income. That may give him more choices when he needs money for a large expense or wants to manage taxable income. A lower RMD total is not the same amount in tax savings. Read Betty Jones’s RMD case study.
What About Investment Growth?
SageonRQ starts with the same investment return assumptions when it evaluates the Current and Modeled Plans. As it compares strategies for Michael’s situation, it may choose a different investment mix for the Modeled Plan. The final plans can therefore have different assumed returns.
In Michael’s case, the Current Plan had an assumed annual return of 6.1%, compared with 6.4% for the Modeled Plan. That is a difference of 0.3 percentage points. The $108,086 increase is not due entirely to Roth conversions or tax planning. The 6.4% return is an assumption, not a guarantee.
Your results may be different. The best strategy for you depends on your savings, income needs, taxes, investment mix, and other retirement factors. That is why SageonRQ looks at the whole retirement plan. See how a separate case study examines a surviving spouse.
What Should You Do Next?
Your best choice may be different from Michael’s. It depends on your savings, taxes, income, spending, investment mix, and years in retirement.
The SageonRQ Retirement Opportunity Audit compares your current path with a modeled strategy using your information. Retirement Strategy Navigator is planned to show the year-by-year details and help you review your choices before making changes.
Start My Retirement AnalysisFrequently Asked Questions
Is paying more tax ever a good retirement decision?
It can be, if the full plan leaves you in a better position after taxes. You need to compare the costs and benefits for your own situation.
Will Roth conversions always increase my ending value?
No. Conversions create taxable income, and they may not be right for every household. The timing and amount matter.
Can Roth savings help me manage taxable income?
Qualified Roth withdrawals generally do not increase federal taxable income. The benefit depends on your account history, withdrawal rules, and personal circumstances.
Does a lower RMD total mean the same amount in tax savings?
No. RMDs are withdrawals, not tax bills. The tax effect depends on the income and tax rules that apply.