Savant - University Wealth Management

Why Your Taxes Could Increase in Retirement and What You Can Do About It Now

Report Summary

In this report, you will learn:

  • Why you may not want to defer taxes until retirement
  • Tax planning ideas you can use today to take advantage of low rates
  • The importance of establishing after-tax savings for your future retirement

Based on our experience, many people in the university community who are nearing retirement assume their tax liability will decrease in retirement. This belief is mirrored by the fact that most university retirement plans are automatically set up to defer all taxes until a distribution is made to the retiree – assumably at a lower income tax rate than when they were working.

However, what if we are already in the lowest income tax rate environment we will see for the rest of our lives? Based on many social and economic factors, we may have the perfect recipe for significantly higher tax rates in the future. The tax environment we’re currently in calls into question the old strategy of “defer, defer, defer” in favor of establishing after-tax retirement savings.

This report will explain why taxes may be on the rise in the future and provide you with valuable tax-planning strategies you can potentially use today to help take advantage of historically low rates, with the goal of keeping you in control of your tax liability in retirement.

Understanding the Landscape

For many years, the rationale on retirement tax planning was simple: defer as much of your current income as possible in pre-tax retirement accounts and pay taxes down the road in retirement when your income will be less. Professors seem to have followed that rule to a “T.” In our experience, most university professionals typically have 90% or more of all retirement savings in pre-tax accounts.

However, this rule is predicated on the assumption that an individual’s tax rate will be lower during their retirement years. From what we see in the current tax landscape, we believe it’s more likely that rates will increase in the years to come. A professor could be deferring taxes now, only to potentially pay a substantially higher tax rate on their retirement income in the future.

Today, income taxes are at historically low rates. In 2017, the Tax Cuts and Jobs Act (TCJA) was passed. Among other changes, this act lowered the effective tax rates for individuals and dramatically widened the income range for some of the middle tax brackets, especially for married couples. Lower tax rates lead to substantially lower revenue and rapidly increasing debt for the government, which is a key indicator that tax rates may increase in the years to come.

These lower rates are set to revert to what they were prior to TCJA in the year 2026. With our nation’s budget deficit growing annually and the economic impacts of COVID, we think many signs point to higher taxes ahead.

While no one has a crystal ball, we believe the most proactive solution is to pay some taxes today at what are likely to be the lowest rates we will see. In a tax environment like this, deferring income taxes for retirement may not be the best strategy. The more after-tax savings you can establish today, the more flexibility you will have over your tax liability as you generate retirement income in the future. If your tax rates do increase, you will have savings you can draw from that will not be subject to income taxes.

How to Establish After-Tax Savings

Will this amount (plus any Social Security benefits) be enough for you to live comfortably? That depends. Do you know what your budget will be in retirement? Will your home be paid off when you retire, or will you be making mortgage payments? Will you relocate to another state (or country) where daily living expenses are different than they are now? Will you live simply, or travel extensively?

Roth Contributions

Roth IRAs are an attractive way to save after-tax money for retirement. Instead of deferring income taxes until a withdrawal is made, an individual makes their contributions with after-tax dollars. If a few criteria are met (the individual reaches age 59.5 and waits at least 5 years from the time of the first contribution), this money will never be taxed again—even the growth. If an individual falls within the IRS income limitations, both spouses can each contribute up to $7,000 to a Roth IRA account annually (if age 50 or older).

If an individual is over the income limitations for a Roth IRA contribution, there are a few other options to consider. Many university retirement plans have introduced the option to make Roth contributions to voluntary retirement plans over the past several years. This option is particularly attractive because there is no income limitation on Roth contributions for employer-sponsored plans, so every faculty member is eligible. Also, the amount you can contribute to a Roth 403(b) is substantially higher—$27,000 annually if you are age 50 or older, per the 2022 IRS limits. Some universities even have an additional Roth 457(b) plan that would allow you to contribute as much as an additional $27,000, for a grand total of $54,000 in potential annual Roth contributions in the university retirement plans.

There is one idiosyncrasy to be aware of with Roth 403(b) and 457(b) accounts available through the university. Unlike a Roth IRA, the IRS rules require university Roth plan participants to adhere to the same Required Minimum Distribution (RMD) rules as pre-tax retirement plans. (There is a fairly simple workaround to this rule by rolling these funds to a Roth IRA prior to RMD age.)

If you are over the IRS-dictated income limitations for Roth IRA contributions and your university does not offer a Roth 403(b) or 457(b), there are still some additional ways you can establish Roth savings. Backdoor Roth and Roth conversions are complex planning concepts and will likely require professional assistance to navigate the tax laws, but it is possible to establish Roth savings for nearly anyone earning an income.

Brokerage Accounts

Another option is to consider investing after-tax money in an investment brokerage account. Money invested in a brokerage account doesn’t qualify for quite the same favorable tax treatment Roth accounts receive, but it can still potentially be a good option. If you buy a stock, bond, or shares of a mutual fund or Exchange Traded Fund (ETF) in this type of account, you will only have to pay taxes on the growth you receive, and only after the investment is sold. Additionally, this growth is taxed at capital gains rates, which are typically less than income tax rates.

Investors should be aware, however, of the annual taxes that can impact a brokerage account. Income earned from interest-bearing investments, like bonds, is taxed at ordinary income tax rates. Mutual funds pass dividend and capital gains income through to the investor and are typically taxed at capital gains tax rates. This type of passive investment income can be avoided by utilizing exchange-traded funds (ETFs).


As you can see, there are several different options you can consider using to establish after-tax savings, and each has its own set of pros, cons, and rules regarding tax treatment. By working with a qualified professional with expertise in both tax and retirement planning, you can help identify which after-tax retirement savings opportunities are right for you.

Don’t Wait to Take Action

Spending some time on proactive tax planning today can potentially make a tremendous impact on your future retirement. With an uncertain tax environment looming in the future, university professionals should do all they can now to retain control of their future retirement savings. While most professors do not object to paying taxes, no one wants to deplete their retirement savings any faster than is necessary. Income taxes in retirement can already be a more costly expense than many anticipate, and economic factors indicate that it may only get worse in the future.

We believe it is very important that you consider working with a qualified financial advisor and consult a CPA when necessary to do effective tax planning and make sure you don’t run afoul of any tax laws. With some effective planning today, you can take advantage of historically low tax rates and help give yourself more control of your tax rates later in retirement. To speak with a financial professional on our team about proactive tax planning, call 800.431.9740.


This is intended for informational purposes only and should not be construed as personalized financial or investment advice. Please consult your financial and investment professional(s) regarding your unique situation.

Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments and/or investment strategies recommended and/or undertaken by Savant, or any non-investment related services, will be profitable, equal any historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Savant is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.

Wise Counsel for University Professionals

Our advisors have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians, and other professionals. We are not associated with any university or any retirement vendor, and we have no access to your private retirement or personnel information.

Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments and/or investment strategies recommended and/or undertaken by Savant, or any non-investment related services, will be profitable, equal any historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Savant is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.