401(k) Millionaire? Top 3 Ways to Save on Taxes

Sean Fullerton: Congratulations. You're a 401(k) millionaire.

Holly Swan: Unfortunately, the taxman has opinions about your post-retirement lifestyle.

Sean Fullerton: He always does. The good news is that tax management can save for 401(k) millionaires roughly $100,000 to more than $250,000.

Holly Swan: Here are the top three tax moves you can make. First, build a Roth conversion habit. Consider converting a measured amount annually during those early post-retirement years when your effective tax rate dips. Even a relatively small conversion of just $50,000 a year for eight years is $400,000 moved into a tax-free bucket while managing your tax liability to the 12% bracket. Those assets can grow tax-free to fund your retirement lifestyle.

Sean Fullerton: Then, fill that tax bracket on purpose. Pick a target tax bracket and steer your income to land in there every year. Start with a one-page income map of all taxable income. That can be earned income, taxable interest, non-qualified dividends, short-term capital gains, retirement account withdrawals, pensions, and rental income.

Holly Swan: Don't forget your taxable Social Security income.

Sean Fullerton: You're right. Use this to determine your top marginal bracket. If you're in a lower bracket, consider taking additional distributions to fill that bracket up. These extra distributions could even be done in the form of Roth conversions for additional tax benefits, as you mentioned, Holly.

Holly Swan: Yup. And, third, treat required minimum distributions like a forecast—not a surprise. Determine what your RMDs (required minimum distributions) could look like starting at 73. And then, use pre-age 73 conversions to keep future forced income from pushing you up that tax escalator.­­­ Mandatory withdrawals are many things. Tax efficient is rarely one of them.