It’s that time of year again: income tax time. And I can’t be sure, but I think many retirees are generally more concerned about taxes in retirement than when working.

I’m no different than anyone else; I don’t enjoy withdrawing from my retirement savings, handing some of it to the government, or having them take back some of our Social Security benefits. The government taketh, then giveth, and then taketh away.

Part of biblical stewardship is paying our taxes—what we owe according to IRS regulations, but nothing more- using all the lawful tax-reduction techniques available.

I have written before that I don’t worry too much about taxes, but as I wrote in my recent “Reflections on Five Years of Retirement” article,

“Because I have so little tax diversification, I wish I had found a way to save more in non-taxable accounts, thought more about Roth conversions, and figured out a way to do them from non-retirement savings, which is the key to optimizing them.”

If this sounds a little like regret, to be honest, I guess it is. I have tried to be diligent in planning for retirement, but this is an area that I admittedly didn’t pay much attention to. In my 30s and 40s, I knew little about how taxes work in retirement.

The consequences haven’t been significant up to now—perhaps because tax rates are historically low. But if they rise dramatically in the future, which is a greater than zero possibility, I might feel differently.

Regret isn’t all bad—there are godly regrets and worldly regrets. Godly regret produces a different outlook and lasting change, but worldly regret produces unbelief and hopelessness (2 Cor. 7:8-10).

Of course, the Bible is mainly concerned about repentance, but I think God doesn’t want us to wallow in ‘everyday’ regrets but to learn from our mistakes and set our hearts and minds on the future instead of the past with faith and trust in him:

Brothers, I do not consider that I have made it my own. But one thing I do: forgetting what lies behind and straining forward to what lies ahead, (Phil. 3:13, ESV).

Here’s the question I want to answer, or at least resolve in my mind: Do the facts warrant my regret? If rates rise, will I have a reason for more regret? To figure that out, I had first to take a little foray into the past.

First, some background

The traditional IRA was introduced in 1974 when I graduated from college. I remember starting work that year for the State of Florida as a social worker in the juvenile justice system, making about $6,500/year. The State had a pension plan, and, under IRS rules at the time, that disqualified me from contributing to an IRA.

I couldn’t have afforded to contribute to one anyway. My wife was also working then, and we were living paycheck-to-paycheck.

As a result of the Tax Reform Act of 1986, a married couple filing taxes jointly would lose the IRA deduction at an income of $50,000. I worked for a bank with a pension plan then, and my MAGI was under $50,000. I opened a traditional IRA in 1985, when I was 33, and made as small contributions as I could.

By 1991, my gross income was over $50,000, meaning I could no longer make tax-deductible contributions to my IRA. So, I focused on my 401(k) instead.

I don’t remember precisely when I first contributed to a 401(k), but it was probably about the same time—in the late 80s or early 90s when I started working in IT for a regional bank holding company.

Roth IRAs appeared in 1998 due to the Taxpayer Relief Act of 1997. In 1998, the maximum contribution to a Roth IRA was $2,000, but now it’s a more meaningful $6,500 for workers under age 50. It’s come a long way.

Roth IRAs were an option for those with higher incomes (under $160,000 in AGI at the time). My income increased significantly after I started working in the corporate sector, and I didn’t qualify in 1999 or into the 2000s. So, I focused on getting the full employer match in my 401(k).

Although I contributed to it regularly, I never maxed out my 401(k) with pre- and after-tax contributions. I know many people try to do that nowadays since the maximum is $23,000 for 2024. But doing my 4, 5, or 6 percent and getting an employer match seemed reasonable. Plus, I had a personal conviction that I always wanted to give more on a percentage basis than I saved.

I was certainly not on my way to early retirement.

As many of you know, most retirement accounts were hit hard by the dot-com crash of 2000 and the housing crash of 2008-2009, depending on how they were invested. I don’t have my older 401(k) records, but my traditional IRA, which was probably 60 to 70 percent invested in stocks, had grown to $187,000 in October 2007. By February 2009, it had fallen to $112,601—a 53% drop!

I stayed the course with my IRA and 401(k) and didn’t “sell out” during that time, but boy, was it challenging; financially, it felt like the end of the world.

As I approached retirement, my savings were almost 100% in a traditional IRA and a 401(k), which are now combined into a single IRA. I also had a small Roth account. I didn’t have a non-retirement regular brokerage account funded with after-tax dollars. Nor did I have any annuities or whole life insurance products.

In other words, all my savings were taxable upon withdrawal. Furthermore, I’m subject to RMDs when I turn age 73.

The small Roth account was a Roth 401(k) I contributed to for about five years while working for my final employer. When I retired, I rolled it over (my contributions but not the employer match, which was pre-tax) into a new Roth IRA account.

I finally had my first (relatively small) Roth IRA! Better late than never, I guess.

Did I make the right choices?

Now that I’m retired, did I make the wrong decisions about traditional versus Roth accounts? Should I have put as much money as possible into Roth accounts over the years instead of traditional ones? I feel like I would have been better off with much more in Roth accounts, but are my feelings justified?

The whole idea of a Roth 401(k) (and, to some extent, a Roth IRA) is to pay taxes now and little or nothing in taxes later.

It may sound counter-intuitive, but all things being equal, it doesn’t matter if you do a Roth and pay taxes now and let your investment grow tax-free, or go Traditional and let your pre-tax investments grow and then pay the taxes as you spend it in retirement. The result is more or less the same.

For you math nerds out there, here’s this concept expressed as an equation.

Let’s use the variables t0 and t1 to represent current and retirement marginal tax rates, respectively, and n to represent investment growth in this illustrative “Commutative Property of Multiplication” equation:

n * (1 – t₁) = (1 – t₀) * n

It highlights that a traditional 401k is more advantageous if the tax rate at retirement is lower and vice versa. However, if your retirement tax rate is lower than your current tax rate, the Traditional 401(k) or IRA might be better because you pay less tax in retirement. If your retirement tax rate is higher than your current tax rate, the Roth 401(k) might be better because you pay taxes at a lower rate now.

Thus, your belief about future tax rates is the most significant determinant of whether you should contribute to a Roth IRA or not. If you think your retirement tax rate will increase, contribute to a Roth IRA while working.

Here are my actual marginal tax rates based on my taxable income for the 15 years before I retired and the tax brackets at the time:

Tax Years	Marginal Tax Rate	Comments
2004, 2005	35%	some of my highest earning years
2006, 2008, 2010, 2013, 2014	33%	still high, but less than 2004-2005
2009, 2012, 2015, 2016, 2017	28%	on the glide path to retirement
2018	24%	retired in the Fall of 2018

With a marginal rate in the 28 to 35 percent range, perhaps you can see why I opted for the Traditional 401(k) and IRA contributions during my peak earning years.

And since my current marginal tax bracket of 22% is the same or lower than the one I was in for the 15 years before I retired (my effective rate of 8.1% is much lower), it seems to me that, at least based on current tax laws, I would not have been better off putting money into Roth accounts after all.

I don’t have easy access to my tax records beyond those years, but I believe my marginal tax rate would still have been higher than it is today. My income was lower in the 1980s and early ’90s, so it’s possible that a Roth would have made more sense then, but I wasn’t in a good 401(k) plan until the early ’90s, and there was no Roth 401(k) option then—the Roth IRA didn’t appear until 1998, and I had already set up a traditional IRA.

It’s important to note that we’re only talking about marginal dollars here—dollars taxed at my marginal tax rate.

My effective tax rates were lower than my marginal rates, averaging in the 13% range (much higher than my current effective rate of 8%). Therefore, it wouldn’t necessarily be true for all the money I could have allocated between a traditional and a Roth 401(k) or IRA. Still, I think comparing marginal rates is a reasonable high-level assessment.

On that basis, I believe my strategy to make tax-deductible contributions to my IRA and 401(k) was reasonable.

We must remember that the U.S. tax system is progressive, and there’s no reason to think it won’t always be. Higher incomes are taxed at higher rates, and the marginal brackets narrow as you move up the income ladder.

Of course, it’s possible that rates could go higher, but at my current income level, they have a long way to go to put me back in the marginal bracket I was in in 2004. In reality, that’s highly unlikely.

Because nobody can predict future tax rates and whether they will be higher or lower than today’s rates, choosing between a Traditional 401k and a Roth 401k is difficult at best. This much is sure: Any Roth contributions you make immediately put some of your hard-earned money into the government’s pockets instead of yours. So there’s that.

What about non-retirement accounts?

If I had saved and invested long-term with after-tax income in a taxable non-retirement brokerage account, I could sell appreciated stocks to generate retirement and pay capital gains tax instead of ordinary income tax.

Long-term capital gains are taxed at lower rates than ordinary income. The amount of tax I would owe depends on my annual taxable income. If my taxable income is less than $94,050, I will pay 0% on capital gains and 15% on income between $94,050 and $583,750.

Since I’m in the 22% marginal bracket, 15% or less in capital gains would benefit me. But alas, I don’t have such an account.

Another option that I didn’t take advantage of was municipal bonds. They are basically like other bonds except that they are not subject to federal income tax. Because of these tax benefits, they usually pay less interest than other bonds.

I know other people who invest in real estate, such as rental properties. Real estate functions much like stocks—it’s typically held for the long term and is subject to a long-term capital gains tax of 0%, 15%, or 20%, depending on one’s taxable income.

If I were to do one or the other, I would have chosen stocks. Real estate is much too time-consuming (those pesky tenants, stuff breaking all the time, etc.), and there’s the high cost of entry (which is why most people use leverage, introducing more risk into the equation). But that’s just me—I know it works great for some people.

Another option that I decided against is “whole life” insurance (also known as “permanent” life insurance).

As they mature and benefits are “paid up,” mutually owned whole-life policies often pay dividends. These are considered a “return of premium”; the insurance company took in more than it needed and is returning some portion to you (how generous of them). Therefore, dividends aren’t taxed because they aren’t income.

The dividend payout is based on a percentage applied to the policy’s “cash value.” It’s unrelated to your actual return on your cash value. Most whole-life policies have a negative return for at least the first 5 to 10 years.

These non-taxable dividends can be used as income, so I guess there’s some value in that. Still, you’re getting your own money back.

Perhaps I should have given more thought to these options. But I had a family to provide for, and I wanted to give as generously as possible, so that kind of saving and investing wasn’t on my radar.

What about Roth Conversions?

Since I had a traditional IRA and 401(K), which are now consolidated into the IRA now that I’m retired, I could have done a Roth conversion, but I never did. I have sometimes regretted that decision. But there are some good reasons why I didn’t:

1) The math on Roth conversions doesn’t work nearly as well if you don’t pay the tax you owe on the conversion from non-IRA funds.

I didn’t save much beyond an emergency fund and some “sinking funds” in a taxable savings account. Between living, giving, and saving, I had very little left in after-tax dollars that could have been used for that purpose.

I never had a taxable brokerage account that I used to invest in stocks or other securities. However, I had stock options and grants throughout my career and used some for various purposes.

But the ones I still owned going into the “Great Recession” of 2008 became worthless after Wells Fargo acquired my employer, Wachovia, on December 31, 2008, after a government-forced sale to avoid Wachovia’s failure due to what now appears to have been somewhat overblown fears of a commercial banking run and collapse of Wachovia’s “sub-prime” mortgage portfolio.

Fortunately, I didn’t need those assets to fund future obligations. I would suggest that anyone fortunate enough to receive this form of compensation from their employer take a similar posture—you never know what will happen to a company or its stock.

2) The decision to do a Roth IRA conversion depends on your current versus future tax rate.

Throughout my working life, there was a lot of uncertainty about taxes. Surprisingly, my effective (blended) and marginal tax rates (~8% and 22%, respectively) are about the same or lower than when I contributed to my traditional retirement accounts 20 years before I retired. So, at least under current tax law, there’s not a lot of savings.

3) Predicting future tax rates is really hard.

Many believe, perhaps correctly, that tax rates will have to rise dramatically to pay for the government’s growing debt and deficit spending. People have been saying that for as long as I can remember. However, when Trump was elected, he lowered tax rates in the Tax Cuts and Jobs Act of 2017 (TCJA).

Those cuts are set to expire on December 31, 2025, and without congressional action, they will revert to where they were in 2017. Here’s a chart showing the comparison (2017 before the tax bill versus this year, 2024):

2017	Married Filing Jointly	2024	Married Filing Jointly
Tax Rate	Taxable Income Bracket	Tax Rate	Taxable Income Bracket
10%	$0 to $9,325	10%	$0 to $23,200
15%	$9,325 to $37,950	12%	$23,200 to $94,300
25%	$37,950 to $91,900	22%	$94,300 to $201,050
28%	$91,900 to $191,650	24%	$201,050 to $383,900
33%	$191,650 to $416,700	32%	$383,900 to $487,450
35%	$416,700 to $418,400	35%	$487,450 to $731,200
39.60%	$418,400+	37%	$731,200 or more

My current marginal tax rate is 22%, which could rise to between 25% and 28% in 2026 if Congress does nothing, depending on my spending and QCDs. My effective tax rate for 2023 is 8.1%, and if my gross income stays the same, my new effective rate would probably increase by at least 2 or 3 percent, a significant but not substantial increase.

Let’s hope Congress compromises on something in the middle. There’s a lot of politics at play, so it’s impossible to predict precisely what will happen. It depends on this year’s election and complicated governmental and economic factors.

One plausible theory is that the TCJA will expire due to congressional gridlock. Without a bipartisan agreement, each political party can point fingers at the other, which is how Congress currently operates.

For these and other reasons, those in the lower marginal tax brackets (10%, 12%, and even 22%) may benefit in future years by shifting their savings to a Roth account or converting them before 2026.

The bottom line is that taxes are much like the stock market and interest rates – no one can be sure what they will be in the future. However, I think that even if interest rates do go up, it’s unlikely that middle-class retirees will see crushingly higher tax rates. Politicians are too dependent on their votes.

No one can be sure what tax rates will be in the future. But what we can be sure of is that tax rates will NOT go up for the middle class. Politicians will always need the middle class to stay in power, so it is unlikely that politicians will hurt the middle class with higher taxes.

Even President Biden has stated that he would not raise taxes on anyone making less than $400,000. If the Democrats remain in power, $300,000 seems to be a conservative income threshold for facing future tax increases. But of course, that remains to be seen—promises, promises.

4) Your gross income will likely be lower in retirement than when you worked. A lower income correlates with lower taxes unless tax brackets go up significantly.

Generally, it’s reasonable to assume that your retirement income is likely lower than when you were working. Mine is undoubtedly lower than during many of my working years, but not all. Most of my income comes from our Social Security and my IRA.

5) Even if your income is the same or higher than when you were working, not all of it will be taxable.

I just finished my taxes. Because of the standard deduction and QCDs, my taxable income was 66 percent of my gross income. It helped that my Social Security isn’t fully taxed, even if I reach the IRS maximum for taxable benefits—85%.

But what about doing a Roth IRA conversion now? I still don’t see how that makes sense because 1) It would push me into a higher marginal tax bracket of 24% to maybe as high as 35%, and 2) I would have to pay the taxes with IRA money, which dramatically affects the math and the likelihood of a positive outcome.

If you’re thinking about a Roth IRA conversion (and some of you should be), you should probably consult a trusted advisor and run various scenarios. One scenario is that you will have a higher income in retirement and, therefore, pay more taxes than when you were working. If that’s you, be thankful, taxes or no taxes. Just because you have to pay a little more in taxes because you didn’t do a conversion is no big deal.

Generally speaking, the best scenario for converting a Roth IRA would be the year you have the lowest income, are in your lowest marginal tax bracket (0%, 10%, or even 12%), and have the money to pay the relatively small amount of tax you’ll owe with non-retirement dollars.

Another good scenario is after you retire when you are in a lower tax bracket but not yet receiving Social Security benefits and have the money to pay the tax.

QCDs have helped

As I wrote in my recent “Five Years of Retirement” article, I turned 70½ last year. This made me eligible to begin making Qualified Charitable Contributions (QCDs) directly from my IRA. I started using them to make donations to my church, our denomination, and various mission organizations.

I devoted an entire article to this topic last year, titled “Looking Forward to Making QCDs,” after concluding that it should be at least somewhat beneficial to me from a federal income tax perspective, even though I’ve been able to itemize my charitable contributions every year since I retired.

I also recently published an article on Humble Dollar titled “QCDs and Me.”

So, did the QCDs help or hurt my overall tax position? I go into this in more detail in the Humble Dollar article. But for QCDs to reduce the amount of taxes beyond what I would have had to pay if I had itemized my deductions, the total of the QCDs plus the standard deduction (SD) had to be more than what my itemized deductions would have been.

Remember, because I’m claiming QCDs, my taxable income (TI) is AGI – (QCDs + SD).

In my case, the sum of my QCDs plus the standard deduction is 7.6% more than what my itemized deductions alone would have been, which immediately tells me that the QCDs have positively impacted my tax situation. That’s what I had hoped for.

If you can itemize your deductions and charitable contributions are a significant part of your deductions, making QCDs when you’re eligible (age 70½) will likely result in a lower federal income tax bill.

However, the impact won’t be as significant as if you made charitable contributions but didn’t itemize. That’s because you can make QCDs tax-free (you reduce your taxable income by the amount of your QCDs) while still being able to take the standard deduction.

The bottom line is that we’re free to minimize taxes and maximize the use of the resources God has entrusted to us for our good and His glory. QCDs are a wonderful gift of common grace for all retirees, especially for Christians who want to be generous in retirement and receive some tax benefits as well.

Also, in 2024, the income limit to qualify for a Roth IRA is <$230,000 of modified adjusted gross income (MAGI) for married joint filers. Given that the median household income in the US is around $75,000, that’s pretty generous.

So, a Roth IRA is now an excellent vehicle for those looking to diversify their retirement income sources. Unfortunately, I never took full advantage of one, but you can if you want to.

So, could I have done better?

As you can probably tell, my answer to that question would be “maybe.” But, honestly, I’m not going to lose a lot of sleep over it.

I have regretted not having a larger Roth account balance, mainly because I don’t particularly appreciate paying taxes as a retiree. But I also don’t think I was foolish to contribute to traditional accounts while I was working.

The facts suggest that I made a reasonable decision, even if tax rates increase a little in the future.

In an ideal scenario where future tax rates and policies are known, solutions would be straightforward and based on mathematical calculations. But this is not, and probably never will be the case.

As I have said many times, retirees make the best decisions they can in a realm of uncertainties, including investment yields, inflation, and prospective tax rates. Each decision involves trade-offs, requiring us to understand and assess our circumstances and determine the optimal course of action.

I can say that QCDs have definitely helped. The only other thing I could do is reduce my spending (and, therefore, the amount I need to withdraw from my taxable IRA) to get below the 22% marginal tax rate. But that strategy will work for only so long—RMDs are on my near-term horizon, and they will put me right back where I am.

So, I’ll keep making QCDs, monitor my marginal tax rate (and reduce it if I can), and do my best to pay my taxes with gratitude. I know that I have been blessed with the privilege of living, working, saving, investing, giving, and retiring in the best country in the world.