Wise Information for K‑12 Employees

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Tax Deferred Investing: The Unexpected Tax Trap

To see the effect of taxes on some retirees, consider the following example:

Susan just retired at age 70. Her last year’s salary was $90,000. Her taxable City pension is $50,000 and her taxable Social Security annuity is $30,000. She has a taxable balance of $1 million in her 457(b) account. She assumes the $1 million will generate a 6 percent return.  Susan saved on the pre-tax basis because she liked the idea of not paying income tax on her 457(b) contributions and having the earnings generated by those contributions also tax deferred until she takes RMDs. Moreover, like most employees Susan assumed she will be in a lower tax-bracket during retirement so investing pre-tax is the way to go. She never realized, however, that when her RMDs kick-in she will have much more taxable income in retirement than while working. Since Susan's birthday is after June 30th, her first RMD is at age 71.

Age LE Factor RMD Year-End Taxable Balance
70 0.0 $0 $1,060,000
71 26.5 $40,000 $1,083,600
72 25.6 $42,328 $1,106,288
73 24.7 $44,789 $1,127,876
74 23.8 $47,390 $1,148,159
75 22.9 $50,138 $1,166,911
76 22.0 $53,041 $1,183,884
77 21.2 $55,844 $1,199,073
78 20.3 $59,068 $1,211,950
79 19.5 $62,151 $1,222,516
80 18.7 $65,375 $1,230,492
81 17.9 $68,743 $1,235,578
82 17.1 $72,256 $1,237,457
83 16.3 $75,918 $1,235,787
84 15.5 $79,728 $1,230,206
85 14.8 $83,122 $1,220,896
86 14.1 $86,588 $1,207,562
87 13.4 $90,117 $1,189,899
88 12.7 $93,693 $1,167,600
89 12.0 $97,300 $1,140,356
90 11.4 $100,031 $1,108,746
91 10.8 $102,662 $1,072,609
92 10.2 $105,158 $1,031,808
93 9.6 $107,480 $986,236
94 9.1 $108,378 $937,033
95 8.6 $108,957 $884,298
96 8.1 $109,173 $828,183

 

Pre-tax investing is not in the best interests of the long term civil servant. Why become a tax victim in your old age? These ever increasing RMDs may be avoided by contributing after-tax dollars to the Roth feature of your 457(b)/403(b) account. Upon retirement these Roth balances are eligible for rollover to a Roth IRA.

 

Retired New York City High School Teacher of Accounting and Business Practice. Pension Columnist: The Chief-Civil Service Leader.