Good Morning...I am working on some yearend planning and am again facing a question.
Both wife and I are self-employed and have Individual 401(k) accounts. These accounts allow for some significant tax "deductible" contributions. What I do each year is use TurboTax to calculate a with and without tax bill (Fed and State) based upon different amounts of 401(k) contributions. I usually make contributions as long as the tax "savings" (deferral) is at least 30-35%...often a bit higher.
Background...at his stage (age 62) we have accumulated investment balance pretty close to allowing for projected retirement needs...it is however, about 70% in the "retirement" pre-tax accounts...ie; we will owe taxes as we withdraw.
While this has all happened "knowingly"
...I thought it mught be interesting to get some thoughts as to whether this continues to make sense?
Assuming our tax deferral is between 30-40% of 401(k) contributions...and assuming the contribution is essentially a transfer from a taxable investment account into the 401(k)...do you feel it is reasonable to continue to move investment dollars into pre-tax accounts...fully recognizing we will be taxed as we withdraw in the future. Probably will begin withdrawing say within 3-5 years? Don't worry about capital gains on the taxable assets for this question.
My general thought is that we are still better off continuing our practice of transfering funds as 401(k) contributions...knowing that it will all be taxable as we withdraw? Ya I also know we should pay the taxes from the annual earnings but it seems we spend much of our self-employment earnings and draw tax amounts from invested $$$s
Thanks for your thoughts...TomCat