A bimodalretirement savings strategy can be a tax-wise strategy that doesn'tpredict the future of tax policy but merely prepares for it.(Photo: Shutterstock)

For as long as you can remember, you've heard the drums. Thisincessant beat has provided the backbone of every retirementsavings article, every employee education meeting, and everypolicy-related discussion. It has become the axiom of retirementsavings. “Save now and reduce your taxes!” came down in athunderous voice for on high. “Obey or face the consequences!” wasthe implicit warning.

Of course, this adage was predicated on the belief your tax ratetoday is higher than your tax rate will be when you retire.

The 2017 Tax Cuts and Jobs Act changed all these assumptions(see “Tax Law Fallout Yields These Five Fiduciary FactsFor Retirement Savings,” FiduciaryNews.com, April 23, 2019). Asa result, our view of what is an appropriate retirement savingsstrategy has changed.

This change hasn't been abrupt. In fact, if we look atretirement savings statistics, millennials have been practicing itfor quite some time. To understand the reason why helps explain howthe new tax law has accelerated and expanded this evolution.

Remember the assumption that fueled the traditional consensusbehind the supremacy of tax-deferred savings. For younger workers,with a lower salary that inhabited lower tax brackets, the ideathat they'd be paying even lower taxes when they retired justdidn't make sense. Where's the incentive to defer taxes?

What's more, they've seen how the power of compounding grew thesize of earlier generations' retirement savings. Million-dollar(and more) IRAs yield higher required Minimum Distributions, insome cases much higher than the typical millennial's currentsalary. Why pay higher taxes in the future and save pre-tax when itmakes more sense to pay lower taxes today and save after-tax?

These mathematics help explain why we see data suggestingmillennials tend to save in Roth plans, not tax-deferred plans.

The new tax law has transformed the retirement savings calculusof older generations to one more like what millennials haveexperienced. We expected the new law to lower tax rates for mostpeople. Experts have looked at the most recent filing data and haveindicated this is precisely what has happened. Even The New YorkTimes begrudgingly admits this is the case (although it adds mostpeople may not believe this fact).

We're all millennials now. There's a strong suspicion a futurenon-Trump president will yield to those preaching economic nirvanais only a major tax hike away. Under this scenario, the RMD's beingspewed from those multimillion dollar IRAs will get soaked by theFederal government at a rate much higher than today. The diligentsavers who avoided paying tax rates in the mid-twenties on smallerlevels of income will therefore be rewarded by paying tax rates inthe mid-thirties on larger levels of post-retirement income.

There's a way out. Do what the millennials do.

For some time now, retirement industry thought leaders havespoke of the wisdom of a bimodal retirement savings strategy. Thisstrategy includes a mix of tax-deferred retirement accounts (liketraditional 401k and IRA plans) and after-tax retirement accounts(like Roth plans). With just a mix, retirees have the flexibilityto take taxable income out at low rates and supplement that withtax-free Roth withdrawals.

This is a tax wise strategy that doesn't predict the future oftax policy. It merely prepares for it.

With most baby boomers and perhaps even some older Gen-Xersoverweighted on the traditional tax-deferred retirement plan sideof this ledger, the new tax law offers a great opportunity to beginfattening up the Roth portion of their retirement savings.

Do you think they can overcome their aversion to paying taxestoday to act in their best interests for tomorrow?

READ MORE:

Get them addicted to saving —Carosa

Would rank-and-file 401(k) retirement saversbenefit from working with an advisor?

Fee compression: Bad for retirement savers? —Carosa