Will a Lifetime of Tax Deferral lead to a Tax Nightmare in Retirement?
The Decumulation Dilemma facing America’s Professors
by Chris Brown, Ph.D., CFP® and Ron A. Rhoades, JD, CFP®
For decades, the standard financial advice has been to maximize contributions to tax-deferred retirement accounts – such as 403(b), 401(k), and unique academic vehicles like the TIAA Traditional annuity. For many academics, it is highly effective during the accumulation phase, allowing them to defer taxes, benefit from immediate tax deductions, and watch their savings compound powerfully over time.
But what happens when a professor begins the shift towards retirement – and must turn towards decumulation?
Those large balances may suddenly become a formidable tax liability – and trigger a cascade of adverse effects in retirement, such as high marginal tax rates, reduced healthcare subsidies, and the notorious “tax torpedo” that targets Social Security benefits.
What’s an academic to do?
Turn to the research, of course. Research from the TIAA Institute confirms that optimal withdrawal sequencing can add meaningful value to retirement outcomes, while Vanguard research emphasizes that paying taxes during lower-income years – rather than deferring indefinitely – often yields superior lifetime results. (TIAA Institute, 2017; Vanguard, 2022) This means that the art of retirement income generation lies in strategically sequencing withdrawals while minimizing the lifetime tax burden.
Get it right, and you preserve significantly more of your life’s savings. Get it wrong, and you may watch the IRS claim a disproportionate share of what you spent decades accumulating.
Research-Backed Strategies from Academics like You
In our latest guide, “Will a Lifetime of Tax Deferral Lead to a Tax Nightmare in Retirement?”, we take an in-depth, research-backed look using hypothetical real-world scenarios to illustrate the complexity that today’s professors face when planning for retirement.
Throughout the guide, you’ll follow Dr. Eleanor Vance, a recently widowed, 62-year-old tenured History Professor at a major university. She wants to retire in a year and has substantial savings spread across a 403(b), a TIAA Traditional contract, a small rollover IRA, a small Roth IRA, and a taxable brokerage account. Our discussion centers on optimizing these accounts – including strategies that leverage the period of maximal tax control before her RMD years while proactively reducing the tax liability of her post-RMD future.
While the numbers are about financial efficiency, the greater impact is psychological: peace of mind knowing Eleanor has a coordinated strategy across her accounts, Social Security claiming, and Medicare premium exposure – fundamentally increasing her purchasing power and longevity of her life’s work.
Key Questions for Professors and Retirement Tax Planning
Our guide is structured as a conversation and looks at key questions that Eleanor – and many academics – face when considering retirement.
What is the optimal order to withdraw funds to flatten your tax rate? How can this be structured before and after RMDs are initiated? We’ll look at topics like income smoothing, including optimizations like Roth conversions, how to address conversion tax, and the power of Qualified Charitable Distributions (QCDs).
How do your withdrawal decisions create the Social Security and Medicare “Tax Trap”? Is it true that one extra dollar of retirement income could trigger $1.85 in taxable income? We’ll look at Income-Related Monthly Adjustment Amount (IRMAA) calculations, which operate like a series of “cliffs,” for Medicare Part B and Part D, and how seemingly small decisions – like whether to file jointly or separately as a married couple – can drastically change the amount you pay in premiums per year. We’ll also look at strategies that could help keep you in a lower IRMAA.
Can your investment choices further enhance tax efficiency? Some advisors may suggest moving investments from TIAA accounts to IRAs. Should you? What kinds of accounts offer tax efficiency, and in what scenarios might they apply? We also explore tax implications of TIAA Traditional withdrawals – but also explore why TIAA Traditional accounts remain a cornerstone of many academic retirement plans.
Ready to learn more?
About the Authors
Ron A. Rhoades, JD, CFP®
Ron Rhoades is an Associate Professor of Finance at the Gordon Ford College of Business, Western Kentucky University. He also serves as a financial advisor at Scholar Financial, a practice within XY Investment Solutions LLC. With a background as both an attorney and a CERTIFIED FINANCIAL PLANNER™ professional, Ron is a nationally recognized authority on the fiduciary duties of financial advisors.
Chris Brown, Ph.D., CFP®
Chris Brown is a faculty member in the Department of Finance at the Gordon Ford College of Business, Western Kentucky University, and a financial advisor at Scholar Financial, a practice within XY Investment Solutions, LLC. He holds the CERTIFIED FINANCIAL PLANNER™ designation and a Ph.D. in Finance. His research and teaching focus is on behavioral finance, retirement planning, and evidence-based investment strategies.
This article and the downloadable guide are for educational purposes only. Scenarios and references to client experiences are used solely to illustrate financial planning concepts. Dr. Eleanor Vance is a hypothetical client and is not directly representative of any current client of Scholar Financial of XYPN Sapphire. These examples may not apply to your individual circumstances. It should not be construed as financial, legal, tax, or investment advice, nor as a recommendation to implement any specific strategy, product, or investment. As a fiduciary, we provide advice tailored to each client’s goals and financial situation. Consult with a qualified financial professional before making investment decisions.
Advisory services are offered through XYPN Sapphire and its various IAR brands under which it operates. XYPN Sapphire is an SEC registered investment adviser. For additional disclosure and privacy information, please visit XYPNSapphire.com/disclosures.
References
TIAA Institute. (2017). Tax-efficient sequencing of accounts to tap in retirement. TIAA Institute Research Dialogue.
Vanguard. (2022). A ‘BETR’ approach to Roth conversions. Vanguard Research.
