The Risk-Reward Blind Spot Part 2: Taxes & Retirement Accounts

A few weeks ago in Part 1 of this series, we pulled back the curtain on the hidden cost of top-line investment numbers. We examined how a headline pre-tax return can quickly shrivel after-tax reality once the IRS takes their piece of the pie, greatly diluting your return per unit of risk. But tactical options within taxable brokerage accounts are only part of the story. To build a resilient, tax-optimized wealth for both your working accumulation and retirement years, this week we turn our attention to the tax aspects of retirement accounts.

To begin, let’s ground ourselves in the basics. What are retirement accounts? The simplest definition is that they tax advantaged accounts (excellent ones, at that) designed for long-term retirement savings, growth, and deferred distributions. Their associated tax benefits provide either up-front tax advantages, or delayed advantages in the future. They also have rules which stipulate when and how you can withdraw from your accounts, or when you’re required to. These specifics mean good tax planning begins when you start

saving, but is just as important to manage when you begin withdraws.

The main variants of available retirement vehicles are as follows:

• Traditional (Pre-Tax) IRA: Allows you to defer taxes on contributions you make today thereby creating a deduction against your current taxable income. However, every dollar withdrawn in retirement is taxed at ordinary income rates. There are also required minimum distributions (RMDs) that kick in your 70s. Think of it as upfront tax relief when you plant the retirement seed, but taxes on the entire harvest later in life.

  
  

• Roth (Post-Tax): You contribute dollars that have already been taxed. In exchange, your money compounds 100% tax-free, and qualified retirement withdrawals are completely tax-free. You pay tax up front so you can keep the entire balance at the end. Roth’s also do not have RMDs. However, high earners quickly run into income phase-outs that restrict direct Roth IRA contributions, making advanced planning essential.

  
  

• Employer Sponsored Retirement Plans: Includes 401(k) and other variants which operate similarly to IRAs, but are tied to your employer. Increasingly, these plans offer both pre-tax and Roth options. Unlike IRAs, they have significantly higher contribution limits and no income phase outs, and may also offer a match from your employer. Typically come with less guidance and limited investment options.

  
  

Among these options, where should you save? Well, if you can, saving in both IRA and employer retirement accounts provides a nice one, two punch. Annual individual contribution limits are significantly lower for IRA accounts ($7,500 in 2026, plus $1,100 catch-up for age 50+), and they also have income phase outs, which for 2026, kick in at just $129,000 of income for married filers in regular IRAs, and $242,000 for Roths. That makes it a challenge for higher income households to save in those vehicles. Consequently, we advocate for maximizing those IRA contributions while you’re young with lower income. As mentioned, a company retirement plan avoids the income limits, and allows for a much higher $24,500 for elective deferrals in 2026, plus catch-up options for those 50 and older. Add in company matches and the combined sum of your personal salary deferral and any voluntary after-tax contributions you make and the combined limit can be as high as $72,000, and higher past age 50.[1]

What about the selection between pre-tax and Roth? Deciding whether to defer taxes now or lock in Roth growth boils down to a marginal tax rate calculation: defer taxes today if you are in your peak earning years and expect a lower rate in retirement, or opt for Roth if your current bracket is low relative to where you expect future tax rates to be.

High earners who are blocked by standard income caps can utilize a clean Backdoor Roth framework to consistently funnel after-tax dollars into a tax-free compounding Roth IRA or consider a Mega Backdoor Roth conversion strategy at their workplace plan to push dollars to the Roth bucket. We help clients with this planning due to the nuance of IRS pro-rata rules and potential taxability of converted earnings. These are unique strategies that offer powerful ways to save tax-free.

The Roth Layer: The Art and Science of Bracket Arbitrage

While optimizing your portfolio tax impacts can sometimes be a matter of mathematical science, managing your total tax picture over a lifetime is where the true art of tax planning comes into play. In your accumulation years strategy is based on maximizing savings and the relationship between your current marginal tax rate, your expected future tax rate, and various other year-by-year tax considerations. Some of these considerations are similar in retirement, although the focus often shifts to income needs, RMDs, social security planning, legacy funds left to heirs and other considerations.

Clients often inquire about their long-term tax strategy in retirement and how to best convert funds pre-tax to Roth. It’s a great question, but there are so many variables to consider that the answer does not lend itself to a “one-size-fits-all” solution. It can feel like a ball of wax with all the different angles to consider. We approach the question first through a long-term lens, tying desired tax advantages with our client’s objectives modeled in their financial plan. From there, we drill down and do the hard work of discrete, year-by-year tax forecasting to make better decisions, because inevitably, financial circumstances change each year. Here are just a few categories we see that introduce variability and tax risk:

•  Spending shifts (some years, you just need that big vacation, or perhaps, less excitingly, a new roof!)

• Required minimum distributions – forecast and timing

• Social Security income

• Medicare IRMAA brackets with associated lookbacks

• Current or anticipated health care spending, and related possible deductions

• Gifts to children or charitable gifts

• Capital gains or losses

• Over or underpayment of previous year’s taxes

• Liquidity events

• Public policy and tax rate changes

• Estate tax considerations

• Etc.

One goal with each year’s analysis is structural tax bracket arbitrage. We actively look for planning windows, temporary "low-income gaps" caused by an early retirement, career transition, or business down-cycle. By intentionally converting pre-tax traditional assets into a Roth account during these low-bracket intervals, you lock in low current tax rates. This permanently insulates those dollars from future, potentially higher tax regimes. Given how hungry we think Uncle Sam is for future revenue, these are a powerful strategy for savings and maximizing your after-tax wealth. [2]

Recent Readings:

Consumer Checkpoint: The great convergence - Bank of America

Why ESG’s Past Returns May Not Predict Its Future- Harvard Business School

The Parallel Rise in Real and Nominal Yields - DoubleLine

[1] https://www.adp.com/resources/articles-and-insights/articles/4/401k-contribution-limits.aspx

[2] https://www.ntu.org/foundation/tax-page/what-are-federal-income-tax-rates-for-2024-and-2025

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.