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How Should Tech Executives Prioritize Their 401(k) Retirement Savings? Thumbnail

How Should Tech Executives Prioritize Their 401(k) Retirement Savings?

For many Tech executives, figuring out the right mix of Roth and Traditional 401k contributions is complex. With the Secure Act 2.0, the IRS will push out the RMD (required minimum distribution) age to 75 in 2033. This could make Traditional contributions more attractive. Let me explain...

Many tech pros will amass a significant chunk of after-tax savings due to their equity comp over their careers. Planned well and mixed with some luck, many can set themselves up for early/early-ish retirement/semi-retirement (55-60).

This sets the stage for 15-20 years of low-to-no ordinary income prior to RMD age. If planned well, during these years, one can live off of their after-tax savings/investments with low capital gains taxes, tax-free Muni bond income, etc.

Also, during these years, they can systematically convert their Traditional 401k/IRA funds to Roth each year, strategically in the amounts that keep them in low ordinary income tax brackets.

Done over 15-20 years, that can be a ton of money converted to Roth before their required to take any money out of their Trad. because of RMD's. 

This is beneficial in three primary ways:

1️⃣ You'd be moving money from pre-tax accounts that you had already benefited from a reduction in income taxes at much higher marginal income tax rates to tax-free money, paying much less income tax rates on the conversion.

2️⃣ Reducing the dollar balance in your Traditional 401k/IRA accounts will lower your RMD amounts in retirement, keeping your ordinary income lower, which reduces your income tax rates through retirement.

3️⃣ You're increasing the money in Roth accounts which have no RMD's at all in retirement. This means you can keep this money in the Roth for a much longer period of time, benefiting from continued compounding effects. Or, you can simply enjoy taking Roth distributions in retirement and paying no taxes on that income.

Done properly, on an after-tax basis, ones net-wealth over their lifetime can be drastically increased. This opens the door to many life possibilities, aspirations, and generational wealth creation.

Of course, this is not a one-size-fits-all kind of strategy. There are many nuances to each person's situation that need to be considered. But in general, the increase in RMD age does open the door even further to this kind of long-term strategic wealth planning for tech execs.

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Matt Faubion, CFP®

Founder - Wealth Manager

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, accounting, and financial professionals if you want more information. This content is developed from sources believed to be providing accurate information, and provided by Copyright (c) 2023 Faubion Wealth Management LLC. All rights reserved. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.