Like many multimillionaires, Curt’s biggest issue is taxes. The 66-year-old from Philadelphia, Pennsylvania recently called in to The Ramsey Show to discuss how his hefty $7.8 million nest egg faces an imminent tax bill. “I can’t solve this,” he told personal finance radio host Dave Ramsey.
Unfortunately, the situation is complicated enough to perplex Ramsey as well. “One end of the spectrum is you get slaughtered, the other end of the spectrum is you bleed to death a drop at a time,” he says. “I don’t know what to do.”
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However, Curt’s situation isn’t unusual and could potentially have been avoided with proactive financial planning at an earlier stage. Here’s a closer look at his dilemma.
Potential tax bill of $2.5 million
Curt has managed to accumulate tremendous wealth. Unfortunately, much of his assets are locked in tax-deferred accounts such as IRAs (Individual Retirement Accounts), 401(k) plans and 457(b) plans. These tax-deferred assets are collectively worth $6 million, according to his estimate.
He’s in an exclusive club. As of June 2024, only 937,747 Americans have $1 million or more in their 401(k) account, according to Empower. Meanwhile, nearly 2.2 million Americans have $1 million or more spread across all of their retirement accounts (including employer-sponsored plans, individual IRA savings and investments), but the average retirement account balance for this cohort is $2,296,695. Curt’s total net worth is more than triple that amount.
“Way to go man! You did great,” Ramsey tells him. “I just wish it wasn’t all in tax-deferred.”
Curt’s financial adviser has explained to him that he faces a hefty tax bill at the age of 73, which is when a required minimum distribution (RMD) is triggered on all his tax-deferred accounts. “This is going to boost me into the highest tax bracket I think and trigger IRMAA [income-related monthly adjustment amount] and other kinds of penalties.”
Ramsey estimates that even if Curt rolled all of his tax-deferred assets into a Roth IRA, he stands to lose 30% of his nest egg or roughly $2.5 million. If he implemented a smaller rollover on an annual basis he would still face a substantial tax bill every year.
“That makes me want to shoot somebody when I think of $2.5 million going to the stupid government,” Ramsey says.
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No magic bullet
Ramsey admits there’s no “magic bullet” to resolve Curt’s situation and that he faces a hefty tax bill regardless of his strategy. He blames the current tax policy for this conundrum and encourages Curt to wait for the outcome of the 2024 election to see if the policy changes.
“This is what tax policy does to people,” he says. “You work your whole freaking life and then you get screwed by the government again.”
However, commenters on YouTube didn’t share this perspective, noting that Curt had accumulated much of this wealth by deferring taxes on earned income during his career. “He isn’t getting screwed, he deferred his taxes,” says one commenter. “Gotta pay sometime, we all do.”
“That's how 401(k)s and 403(b)s have always worked. Did this guy just realize that?” says another.
Indeed there are certain strategies for reducing tax liabilities on tax-deferred assets, ranging from intangible drilling costs (IDCs) on oil and gas investments to charitable remainder trusts (CRTs), according to chartered financial consultant Brian Skrobonja. Curt could have potentially reduced his liability had he acted sooner with a financial advisor to hold on to as much of his wealth as possible.
When it comes to tax planning and working with a financial expert, starting early is often advantageous. However, the average American only seeks the services of a financial adviser at the age of 38, according to Northwestern Mutual’s 2024 Planning & Progress Study.
In fact, Ramsey himself says he doesn’t face the same situation because he planned ahead. “I'm 63 and I've systematically moved 100% of my stuff to Roth over the past decade for that reason because I knew I was going to have RMD coming down my throat,” he says.
It’s not too late for Curt either. Ramsey believes if he “rips the bandaid off” and pays his taxes now, he could avoid a much larger tax liability if the assets grow to $20 million by the time he’s 80 years old.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
