A Better Way To Save For Retirement

Nikulski Financial, Inc. |

When it’s time to finally sit down with a new financial advisor, most people fall into two camps: first-timers who have never hired a professional advisor before, and people who are no longer happy with their current advisor.

Typically, until you speak with a potential advisor on the phone or in person, you won’t fully understand the value proposition of what their firm offers or what differentiates them from all the others out there.

The intent of this article series is to illustrate how our firm focuses our energy to help our clients. Sure, there are items that are missing from this list, but when someone visits with us about starting a relationship with our firm, we focus on these four areas and this is where we believe we are just a bit different from the other firms out there.


Let’s start with an example. Kent, a client of ours (fake of course) did a masterful job of saving while working for a large company over the last 30 years and has accumulated $1 million in his 401k. This is his only retirement account. Kent’s spouse, Carly, was an executive at a local paper distribution company and she also did a great job saving for retirement. Her 401k is around $1.5 million. In total, $2.5 million has been put away for retirement, which for all intents & purposes, is a job well done.

However, this is where things get interesting… and this is where our first value proposition comes into play. Fortunately for Kent and Carly, they did a wonderful job saving.  Unfortunately, however, all their retirement assets are in tax-deferred accounts, which will require the payment of ordinary income taxes upon every distribution that occurs.

This issue has been aptly named the “Tax Time Bomb”.

Let’s take this example: Kent and Carly need to buy a new car in retirement. Assuming the car is $40,000 and that they pay 25% in federal income tax and 5% on the state level, the “cost” of that $40,000 distribution from their tax-deferred accounts to pay for the car would increase to $57,142.86.

On top of the income tax on every distribution in retirement, Kent and Carly should consider the tax rates that might apply in certain situations in retirement. A second example let’s discuss how life expectancy differs for men and women. Sorry guys, the gals have you beat on this one! Kent meets an untimely death. At this time, Carly may be obligated to pay taxes at the higher individual rate vs. the more beneficial married filing jointly rate. If Kent and Carly had been saving with the Tax Time Bomb in mind, this could be different, more beneficial to Carly.

We have been told to invest in tax-deferred accounts for a long time. These accounts (401(k), 403(b), 457, etc.) quickly became the primary account types that employers offered workers when defined benefit pensions began to go to the wayside.  They are certainly a good benefit for all participants who are using them to their advantage.

What we hope to do is show our clients how some slight adjustments in how they’re saving can lead to potentially an even more successful retirement. 

One of the largest value-added benefits we add for our clients is the discussion around what we have coined as the “Tax Control Triangle”. Within this analysis, we look at each client’s array of retirement accounts: pre-tax tax-deferred, after-tax tax-deferred, and taxable. We look to take advantage of the differences in how the underlying assets are taxed to create a smooth transition into retirement, and as low as possible tax rate through retirement.

As mentioned above, 401ks are one form of a tax-deferred account, where no taxes are paid until the money is withdrawn. However, when 401(k) distributions are taxed, they are taxed at ordinary income tax rates.

The second type of account used in the analysis is any Roth account, which is an after-tax account, where taxes have been paid already and the assets & gains on those assets (IRAs or 401ks) are not taxed annually or upon qualified withdrawal.

Finally, the last type of account can be referred to as taxable accounts, which comprise any traditional brokerage or joint non-qualified account. Within this type of account, the owner is only responsible for taxes that result from any capital gains or annual distributed 1099 income that occurs.

In summary, we have discussed the following accounts:

  • Pre-tax, tax-deferred (401k, IRA)
  • After-tax, tax-deferred (Roth 401k, Roth IRA)
  • Taxable (JTNQ, Brokerage)

At Nikulski Financial, Inc. we begin to assess the risk of the so-called “Tax Time Bomb” immediately with potential clients. We can then start to put a plan in place that is mindful of both the short-term and long-term.

Because where you accumulate wealth from an income tax perspective can be just as important as how much you accumulate.

Should you have any questions about this topic, or would like to discuss your situation further, please let us know and we’d be happy to help.