Category: Physician Retirement Planning

Earlier this year, I posted about the pros and cons of including cryptocurrency, such as Bitcoin, in your retirement portfolio. The greatest argument against cryptocurrency as a retirement investment is that its inherent qualities will preclude any country from adopting it as a mainstream currency in the long run. The reasons why? Cryptocurrency is deflationary and interferes with countries’ monetary policy.

Why cryptocurrency is deflationary

You might ask “If inflation is bad and deflation is the opposite of inflation, then deflation must be good, right?“. It is not even close, deflation is much worse than inflation. On the surface, deflation sounds like it ought to be desirable – over time, the cost of goods and services falls and everything gets cheaper. But hidden behind that statement are implications that can wreck a country’s economy and bring misery to consumers.

Let’s use Bitcoin as an example of a typical cryptocurrency. Bitcoins are created by “miners” who use powerful computers to create blockchains by solving complex mathematical problems. But there is a limited number of Bitcoins that can be created – 21 million. As of this year, 96% of these have already been “mined”, leaving less than 1 million left to be mathematically discovered. Every year, it gets harder and harder to mine the remaining Bitcoins and it is projected that all of them will be mined by 2140. After that, no more Bitcoins will exist to be generated and put into circulation.

But Bitcoins get lost. A Bitcoin is simply a long number and to store a Bitcoin, you either have to write that number down on a piece of paper or store it on a computer somewhere. Inevitably, people lose their Bitcoin numbers. Maybe a Bitcoin owner loses the piece of paper that the Bitcoin number was written down on. Maybe their computer is stolen or destroyed in a house fire. Maybe the Bitcoin owner dies without telling anyone where the Bitcoin number is hidden. Presently, it is estimated that between 11% and 20% of Bitcoins have already been irretrievably lost. Once lost, those Bitcoins cannot be re-mined. They are lost forever and thus the number of circulating Bitcoins progressively falls.

Paper currency does not have this problem. Every year, millions of $1, $5, $10, $20, and $100 bills are accidentally burned, torn, or misplaced. Nickels, dimes, and quarters are accidentally thrown away, lost, or damaged. This poses no problem for the U.S. government – we simply print more dollar bills, keeping the total amount of U.S. currency in circulation constant.

But as the number of new Bitcoins mined each year continues to fall and some Bitcoins are inevitably lost, the Bitcoins remaining in circulation become more and more valuable since there are less and less of them. The result is deflation – a car costing 1 Bitcoin today might cost 0.9 Bitcoin tomorrow. Sounds great, right? Wrong – it also means that a worker getting paid 1 Bitcoin per month in wages will only earn 0.9 Bitcoin the next month.

When an economy undergoes deflation, consumers hold off on making purchases, anticipating that their currency (in this case a Bitcoin) will buy more in the future than in the present. This suppresses consumption. As consumer consumption falls, demand for goods and services fall and producers have to start laying off workers, leading to rising unemployment. It gets worse because during deflation, investors start hoarding currency because it can increase in value faster than other investments, such as stocks and bonds. Deflation would thus take even more Bitcoins out of circulation, causing a spiral of worsening deflation and negative economic growth.

Cryptocurrency subverts a country’s monetary policy

One of the advantages of cryptocurrency is that it avoids manipulation by governments. But this is also one of its liabilities. Central banks, such as the Federal Reserve, adjust interest rates and money supplies in order to combat inflation and unemployment. Because cryptocurrency, such as Bitcoin, is decentralized, adoption of a cryptocurrency as a national currency would strip the ability of that country’s central bank from adjusting interest rates to increase or decrease the money supply. This essentially makes central banks impotent to fight inflation or to prevent recessions. So, if there are supply chain disruptions, such as occurred with shipping during at the beginning of the COVID pandemic, or oil transport disruption such as occurred during the U.S.-Iran war, then the Federal Reserve would be unable to raise interest rates to prevent runaway inflation. No country (or group of countries in the case of the European Union) wants to give up its autonomy over its internal monetary policy.

High transaction fees

For blockchain-based cryptocurrencies to function in a transaction, there has to be a large network of independent computers that compete to validate a transaction involving a particular cryptocurrency unit by solving a complex mathematical puzzle. Once a computer on the global network solves the mathematical puzzle, other computers on the network must then confirm the validity of the transaction. Only then is, a new block is permanently added to that cryptocurrency unit’s blockchain and the transaction is completed. The computers on the global network are called miners, because they also solve mathematical puzzles to discover or “mine” new cryptocurrency units. These miners make money by selling their newly mined cryptocurrency and also by charging a transaction fee when validating every cryptocurrency transaction.

Transaction fees are not new. Every time you buy something using a credit card, the person selling that something has to pay the credit card company a percentage of that transaction, typically 1.5% to 3.5%, depending on the specific credit card. Retailers detest these transaction fees because they significantly increase their overhead expenses. That is why many small business owners accept only cash and do not accept credit cards. That is also why many businesses charge customers 2.5% or 3% more if they use a credit card.

Unlike credit card fees, Bitcoin transaction fees are paid by the buyer, not the seller. Also unlike credit card fees, Bitcoin transaction fees are a fixed amount, rather than a percentage of the transaction. Bitcoin miner transaction fees vary depending on how busy the miner network is that moment and the amount of data in that particular Bitcoin transaction. In general, the transaction fees range between $0.20 and $2.00. So, if you are paying your $1,500 monthly apartment rent in Bitcoin, that transaction fee is inconsequential. But if you are paying for a $2 coffee at your local coffee shop, the transaction fee can double the price of a cup of coffee. Moreover, you won’t know what the transaction fee is until after that transaction is completed.

For small purchases, cryptocurrency is simply untenable.

No currency is perfect

Over the centuries, humans have used all sorts of things as currency – salt, cowrie shells, squirrel pelts, for example. The United States printed silver certificates until 1964 – these were paper currency used in circulation that could be exchanged with the U.S. Treasury for a defined amount of silver bullion. In 1973, the U.S. went fully off the gold standard when Richard Nixon permanently revoked the ability of banks and foreign governments to convert U.S. dollars into gold bullion.

At present, the most important currencies are the U.S. Dollar, European Euro, Japanese Yen, and British Pound. But national currencies have their own drawbacks. Countries can manipulate their currencies by depressing their value in order to make their exports cheaper, as China did in 2019. Countries can simply print too much currency, as post-World War 1 Germany did resulting in hyperinflation in 1923 with prices doubling every few days. Currency crises can result when investors lose confidence that a country can maintain a fixed exchange rate, as happened in Argentina in 1998 following years of budget deficits, corruption, and governmental economic mismanagement.

Even the venerable U.S. Dollar is susceptible to losing its prominence as the world’s currency standard because of the threat of the Federal Reserve losing its independence from political pressure and because of the threat of our rising national debt. Nevertheless, the downsides of cryptocurrency are overall more hazardous than the downsides of national currencies.

So, what about your investment portfolio

Bitcoin is not going to go away in the near future. It is untraceable, transferable with a computer mouse click, easily moved from one country to another, and totally anonymous. It will remain the currency of choice for money launderers, kidnappers, scam artists, and drug cartels. It is also currently fashionable as currency for tech bros who feel avant-garde paying for stuff with Bitcoin the way their parents felt when flashing their American Express Platinum credit cards.

But a country would have to be completely nuts to adopt Bitcoin as its main currency. It would be economic suicide. Because of this, it is extremely unlikely that Bitcoin will be a future mainstream currency. And Bitcoin is not alone – there are currently about 30,000 different active cryptocurrencies that have been created on blockchain networks. One of the most notable is $TRUMP, a cryptocurrency and World Liberty Financial, a crypto platform, both created by the Trump family when Donald Trump was inaugurated for his second term in presidency. By selling World Liberty Financial tokens and $TRUMP mime coins to foreign governments and others seeking political favors, Donald Trump and his family personally made over $2 billion last year. It is unlikely that there will be much of a market for WLF tokens and $TRUMP mime coins when Mr. Trump’s term ends and he no longer welds the economic and political power he currently has.

Past generations have bought up Beanie Babies, Cabbage Patch Kids, Hummel figurines, and holiday Barbie dolls in expectation of their increasing in value in the future. Today, these “investments” are practically worthless. Many of today’s highly sought cryptocurrencies are destined for the same future fate as Beanie Babies. So, before you invest in a cryptocurrency as a part of your retirement portfolio, think about whether that cryptocurrency will realistically be used in the future as a mainstream currency to purchase goods and services. If it won’t be, then in 30 years, your retirement portfolio will consist of a bunch of worthless numbers, like a vault full of Beanie Babies today.

Personally, I do not believe that cryptocurrency will be widely used as mainstream national currencies and for that reason, I do not believe that cryptocurrency will hold its value as a long-term investment. That is why I do not have cryptocurrency in my long-term retirement portfolio.

June 19, 2026

In very general terms, the best years to contribute to a Roth IRA, Roth 403(b), or Roth 401(k) are years when your income tax rate today is lower than your income tax rate will be when you retire. There are two ways this can happen, either (1) your taxable income is higher in retirement than it is today or, (2) income tax rates are higher in your retirement years than they are today.

Many financial pundits say that most people’s income is lower in retirement than it is when they are working. But as a retiree myself, I think it is better to save so that your disposable income in your retirement years is higher than during your working years. The reasons why I believe this is that when you are retired, you want to have the resources to do all of the things that you didn’t have time to do when you were working such as travel, take up new hobbies, buy a boat, buy a retirement home, etc. Additionally, healthcare costs increase exponentially such that the average healthcare expenditures for an 85-year-old is $46,500 per year whereas healthcare expenditures for a 40-year-old is only $8,600. Americans need sufficient annual retirement income to cover these increasing healthcare costs. Assuming tax rates remain constant, good years to contribute to a Roth account are:

• Early in your career when your salary is relatively low before you get promotions or gain seniority
• Years when you are off work or working part-time for a few months, resulting in a lower annual income
• When you plan on retiring late in life, resulting in a large amount of retirement savings and thus a high annual retirement income
• If you anticipate a large taxable inheritance during your retirement years, such as an inherited tax-deferred IRA or annuity

Federal personal income tax rates are at historic lows at present. The big question is will they remain low or will Congress increase personal income tax rates in the future? It takes a lot of money to run the federal government and the way governments get money is through taxes. If any government lowers or eliminates income taxes, it has to increase other types of taxes, like excise taxes, capital gains taxes, property taxes, sales taxes, or tariffs. It is kind of like the whack-a-mole carnival game.

Last year, Congress voted to continue the 2016 federal income tax cuts. In order to do this, the government reduced expenses by laying off a large number of government employees and eliminating a large number of federal grants and programs. Reducing expenses alone was not sufficient to permit the low income tax rates, so the President instituted sweeping import tariffs, which are consumption taxes paid by American consumers who purchase products and supplies that originate from other countries – essentially a sales tax on anything that is not manufactured or produced in the United States.

Government spending will rise in the future

The largest federal government expenditures are Medicare & Medicaid (24%), Social Security (22%), interest (14%), and defense (13%). Together, these 4 spending categories account for nearly three-quarters of the annual U.S. budget. Eliminating or cutting back on other federal programs is great for scoring political points but in reality has a negligible effect on the federal budget. There are reasons to believe that none of these four major categories of government spending will decrease in the near future:

Medicare and Medicaid

There are two reasons to believe that Medicare and Medicaid expenditures will rise in the future: healthcare inflation and the aging U.S. population. American healthcare is expensive and increases significantly with age, averaging $26,490 per year for Americans between 65-84 and $46,506 for Americans over age 85-years-old.

Historically, healthcare costs has risen faster than the general inflation rate. Between 2000 and 2023, healthcare costs increased by 121% whereas the cost of all goods and services in the U.S. increased by 86%. Assuming this trend continues for the next 10 years, the cost to provide healthcare to all Americans will continue to outpace the country’s overall inflation rate.

The U.S. population is aging due to a longer life expectancy and a decreased birth rate. In 1960, the U.S. birth rate was 3.7 children per every American woman. In 2024, the birth rate had fallen to the lowest in history at 1.6 births per woman. This declining birth rate has resulted in fewer young Americans compared to elderly Americans. At the same time, Americans are living longer. After a drop in life expectancy during the COVID pandemic, U.S. life expectancy reached an all-time high in 2024 at 79.0 years. The net result is that the number of retired Americans is increasing relative to the number of working Americans.

Medicare is paid for by both payroll taxes and U.S. government general funds. Payroll taxes that you pay during your working years are not saved in an account somewhere to cover your Medicare expenses later in life. Instead, Medicare costs of today’s retirees are paid by today’s U.S. workers’ payroll taxes. But Medicare is also funded by government general funds and the source of those general funds is federal taxes. As the percentage of Americans over age 65 increases at the same time that the healthcare inflation rate increases, it will put increasing demand on a shrinking percentage of American workers to pay for Medicare through taxes. The bottom line is that the federal government will have to increase some form of taxes to pay for the future increased cost of Medicare.

Social Security

Medicare and Social Security are both funded through payroll taxes. Thus, the declining U.S. birth rate and increasing U.S. life expectancy are affecting Social Security in the same way that they are affecting Medicare. Previous estimates were that the Social Security Trust Fund would run out of money in 2033. Yesterday, the Congressional Budget Office released projections that the Social Security Trust Fund will be depleted sooner than previous estimated, in 2032. The main reason for this is that the CBO revised its economic forecast and now predicts a higher inflation rate than it previously predicted. Because the annual cost of living increase in Social Security benefits is tied to inflation, if inflation rises, so too do Social Security expenditures. Once the Social Security Trust Fund is depleted, monthly Social Security checks will be reduced to equal the amount taken in by payroll taxes each year. Current payroll tax rates will only provide enough money to pay for 81% of future Social Security monthly benefit checks. Therefore, beginning in 2032, the federal government will only have two options: either reduce Social Security benefits by 19% or increase taxes to maintain current Social Security benefits.

Interest payments

The interest rate that the federal government pays on Treasury bonds, notes, and bills is tied to the Federal Reserve’s lending rate. In turn, the main driver of the lending rate is the nation’s inflation rate. Although inflation has cooled since the supply chain disruption caused by the COVID pandemic, it has stubbornly remained above the Federal Reserve’s annual inflation target of 2.0%. One of the main reasons for the persistently high inflation rate this year is tariffs being charged on goods and products imported from other countries. Tariffs are essentially a sales tax on imports that are ultimately paid by American consumers, thus raising the prices of anything manufactured abroad or made from products and natural resources produced abroad.

There are two ways to reduce the amount that the federal government pays for interest: either lower the Federal Reserve’s lending rate or stop borrowing money. The Federal Reserve is currently opposed to reducing the lending rate because rate reductions will worsen inflation. The federal government cannot stop borrowing money because it is spending more than it takes in from taxes and tariffs. Therefore, the government is stuck with having to borrow more and more money at high interest rates. This will grow the amount that the Federal government must pay each year in interest. To make matters worse, as the U.S. deficit increases, its credit rating will eventually fall, resulting in even higher interest rates that the government must pay to borrow more money.

Defense spending

The United States spends slightly less on defense each year than it does on interest. However, the U.S. prides itself on the most powerful and technologically sophisticated military in the world. The U.S. uses the threat of its military for geopolitical leverage. To cut back on military spending would be to allow other world powers, such as China, to overtake the U.S. in military clout. The Congressional Budget Office projects that defense spending will increase by 1.1% between 2025 and 2029 (adjusted for inflation) and then increase a whopping 11% between 2029 and 2039 (also adjusted for inflation). Thus, not only will defense spending not be lower in the future but it will actually be a lot higher in the future.

If the government can’t reduce spending, it will have to increase taxes

With 73% of U.S. government spending most likely to increase, rather than decrease, the only way to avoid spiraling federal debt will be to increase taxes.

Data from the U.S. Department of the Treasury reports that individual tax accounts for the largest percentage of federal revenue at 52%. The vast majority of individual tax is the personal income tax accounting for 91% of individual tax; capital gains tax accounts for about 9% of individual tax. Payroll tax is the second largest income source at 32% and is taxed at 15.3% of gross income with half paid by the employer and half paid by the employee. Payroll taxes only apply to the first $184,500 of gross income – any amount above that is not subject to payroll tax. Tariffs account for 7% of government revenue and are applied to imported goods and products. Corporate income tax accounts for 6% of government revenue and is a flat 21% of corporate profits (gross revenue minus expenses and deductibles). Excise tax is a form of sales tax charged on things like alcohol, gasoline, tobacco, and airline tickets. Estate and gift taxes account for <1% of government revenue and are charged on inherited estates greater than $13.61 million (individual) or $27.22 million (married couples). Gift taxes are levied on annual gifts exceeding $19,000 (individual) or $38,000 (married couples). Estate and gift tax rates range from 18% to 40%.

Tariffs and excise taxes are “consumption” taxes, similar to sales taxes levied by states and local communities. Personal income tax and payroll tax are both types of income tax that are paid by the individual worker and based on the amount that you earn. Corporate income tax and individual capital gains tax are very different from personal income tax in that they only apply to profits – either corporate profits or personal profits from asset sales. Because of this, corporate income tax is ultimately paid by investors in the way of reduced dividends and by consumers in the way of higher prices for the products produced by the corporations. Capital gains tax is simply paid by the individual investor.

Over the past 50 years, the percentage of total federal government revenue from payroll taxes has grown while the percentage from excise taxes and corporate income taxes has fallen. The percentage from individual income taxes has also grown, albeit at a much slower rate than payroll taxes.

Roth retirement accounts and taxes

If the federal government increases personal income tax rates in the future, then investing in Roth accounts now is advisable. But increasing any other type of tax will not affect Roth accounts. Payroll taxes paid by the individual are always paid in the year that you earn money, even if that money then goes directly into a tax-deferred retirement plan such as a 401(k) or 403(b) and thus are not at all subject to the financial forces that govern the decision of whether to contribute to a tax-deferred retirement account or a Roth retirement account. Similarly, capital gains tax is only paid on non-retirement investments and does not affect the decision about whether to contribute to a tax-deferred or Roth retirement account.

The impact of increasing different types of federal taxes

Increasing payroll taxes or increasing the maximum income subject to payroll taxes can help keep Medicare and Social Security solvent but will not help cover the increasing federal expenditures on interest and defense spending.

Increasing capital gains tax rates could be applied to increased interest spending and increased defense spending but capital gains accounts for only a very small amount of total government revenue – about 4.6%. Therefore, capital gains taxes would need to be increased to astronomical levels to make up for the projected increases in government spending on interest and defense.

Increasing tariffs could be applied to interest and defense spending but tariffs would need to be dramatically increased. Like any consumption tax, tariffs are inflationary in the short term and this could potentially result in higher interest rates and thus more money that the government has to pay for interest payments to borrow money. However, because tariffs cause a one-time increase in the price of imported goods and products, they have relatively little impact on long term inflation. Another problem with tariffs is that they encourage consumers to buy domestically produced goods and products so that over time, American consumers buy less imported goods and products, thus reducing the amount of money that the federal government brings in from tariffs.

Increasing corporate income tax could be applied to future increased government spending. However, when corporations are faced with increased tax expenses, they either have to reduce dividends paid to investors or increase the cost of goods and services sold. Last year, U.S. corporations distributed $2.26 trillion in dividends. The government collects a total of $5.23 trillion in revenue each year so increasing the corporate income tax rate would seem to be a viable option to solve the looming U.S. debt. Especially because foreign investors own approximately 40% of U.S. stocks, meaning that foreign investors receive about 40% of the dividends from U.S. companies. However, not all corporations distribute dividends, so increasing the corporate income tax rate to 25% or 30% would likely result in increased costs of goods and services purchased by consumers. In other words, inflation.

Excise tax is a type of sales tax ultimately paid by consumers. Currently, the amount of revenue from excise taxes is so small that to cover the looming deficit, the federal government would need to start taxing other goods and services, in essence instituting a national sales tax, similar to the “value added tax” used by 160 different countries. The value added tax used in European Union countries averages 22% and the value added tax used in the U.K. averages 20%. Excise tax and sales tax cause a short term increase in inflation but have little impact on long term inflation.

Estate and gift taxes account for such a small amount of government revenue that any realistic increase in these taxes would have a negligible impact on the federal deficit.

Trying to predict the future

From the above discussion, it is clear that the federal government will need to increase some form(s) of taxes in the near future in order to pay for the projected increases in Medicare, Social Security, defense, and interest spending. The big question is which types of taxes will be increased? Increasing consumption taxes such as tariffs, excise taxes, or a national sales tax would likely be favored by conservatives. Increasing individual income tax rates and corporate income tax rates (particularly on high earners and large corporations) would likely be favored by liberals. Consumption taxes disproportionately affect lower income people whereas income taxes disproportionately affect higher income people.

If the government increases individual income tax rates in the future, then now is a great time to put money in a Roth 401(k), Roth 403(b), or Roth IRA. If the government increases other kinds of tax, then there will be no impact on whether or not to contribute to a Roth retirement account. Does the United States have the stomach for returning to the pre-2016 personal income tax rates? Or will the U.S. increase some other form of tax?

What is clear is that the rates of some type or types of tax are going to have to increase between now and when most working Americans eventually retire.

The safest approach for the prudent investor is to contribute to both tax-deferred retirement accounts and Roth retirement accounts this year. That way, you hedge your bets on whether your personal income tax rate will be higher or lower in retirement than it is today. If political sentiment seems to be shifting toward increasing the personal income tax rate, then change your strategy and put as much money as you can in Roth accounts before the higher tax rates are instituted. If, on the other hand, political sentiment seems to be to increase consumption taxes or corporate income taxes, then the decision about whether to contribute to a tax-deferred or Roth retirement account should be based on your assessment of whether your taxable income today is likely to be higher or lower than your taxable income in retirement. By contributing to both tax-deferred and Roth retirement accounts, you create a diversified retirement portfolio and a diversified portfolio is the strongest portfolio you can build.

Create a diversified retirement portfolio

Your retirement portfolio should be diversified by having money in five different types of accounts:

• Fixed income. This includes Social Security benefits, pension income, and annuities.
• Tax-deferred. This includes a regular 401(k), 403(b), 457, traditional IRA, and SEP.
• Roth. This includes a Roth 401(k), Roth 403(b), and Roth IRA. Not all employers offer a Roth 401(k) or Roth 403(b) and if your income is too high, you cannot directly contribute to a Roth IRA. However, anyone can contribute to a traditional IRA and then do a “backdoor Roth” by then immediately converting that money into a Roth IRA.
• Regular investments. These are investments that you make with your post-tax income such as mutual funds or stocks from a brokerage account. This could also include investment possessions such as gold, art, or real estate properties.
• Cash. This includes money held in your checking, savings, or money market accounts. Holding a lot of money in cash is a poor choice for long term investing because it will lose money compared to inflation. However, even in retirement, it is desirable to keep a cash emergency fund sufficient to cover at least 3 and preferably 6 months of basic expenses in case of unexpected large expenses or a sudden dramatic fall in the stock and bond markets.

By having your retirement portfolio split between these 5 buckets, you can strategically withdraw from different buckets depending on how the market is doing and what the income tax rates are in any given year of retirement. This then allows for maximal annual disposable income while maximally preserving portfolio principal.

February 25, 2026

Cryptocurrencies, such as Bitcoin, have been getting a lot of attention as investment options recently. But should you add cryptocurrency into your retirement portfolio? Financial advisors often recommend a 5 group diversification strategy for retirement investments: (1) U.S. stocks, (2) foreign stocks, (3) U.S. bonds, (4) foreign bonds, and (5) real estate. Instead of buying individual stocks, individual bonds, and individual real estate properties, most investors opt for stock mutual funds (or ETFs), bond mutual funds, and real estate investment trusts (REITs). Many investors are now questioning whether they should add cryptocurrency as a sixth group.

So, what is cryptocurrency really?

Cryptocurrencies are digital currencies that are contained on networks of computers using a public ledger technology called blockchain. Transactions involving cryptocurrency is recorded in digital “blocks” that are attached to previous blocks of transactions resulting in a chain of blocks that represent the chain of custody of that particular cryptocurrency, for example, a bitcoin. The blockchains cannot be altered but each transaction must be validated by computers on the blockchain network called “miners”. Once the transaction is validated, that transaction block is added to the blockchain and the cryptocurrency then transfers to its new owner.

When you invest in a stock, you buy part ownership in a company. When you invest in a bond, you buy part ownership of a loan to a company (or a loan to a government). When you invest in gold, you own metal that can be converted into jewelry or electronics. But investing in cryptocurrency is like investing in any kind of currency: U.S. Dollars, British Pounds, Euros, Yen, etc. The difference is that U.S. Dollars are backed by the “full faith and credit” of the U.S. government. Similarly, Pounds are backed by the British government and Euros are backed by the European Union government. Cryptocurrencies are not backed by any government or anybody. They are simply strings of computer code that a lot of people have decided to use as money.

The value of any given nation’s currencies is based on the general perception of the strength of that nation’s economy. In turn, that perception is based on such metrics as that nation’s inflation rate, interest rates, GDP, government debt, trade balance, and central bank monetary policies. An advantage of cryptocurrencies is that they are not regulated by any government and are thus immune to government interventions. Additionally, they are decentralized, thus allowing for rapid transfer of money, anywhere on the planet. For these reasons, many people have embraced cryptocurrency as the future medium of exchange to replace currencies of individual countries.

Currently, cryptocurrency is used by 7% of U.S. adults for investment, 1% of U.S. adults for purchases (transactions), and 1% of U.S. adults to transfer money from one individual to another. Men are twice as likely to use cryptocurrency for transactions as women and the majority of cryptocurrency users are under age 60. Interestingly, low income adults making less than $25,000 per year are four-times as likely as middle income or high income adults to use cryptocurrency for transactions. On the other hand, high income adults are twice as likely as other income groups to buy cryptocurrency as an investment.

The problems of cryptocurrencies as retirement investments

As I see it, there are several reasons why investors should be cautious adding cryptocurrency to their retirement portfolios:

• Lack of precedent on long-term returns. A key factor in deciding whether to buy a particular investment is one’s investment horizon. The investment horizon is how long you plan on holding that investment before selling it. For example, saving for a down payment on a new car purchase in 6 months is a short investment horizon whereas saving for retirement 35 years from now is a long investment horizon. It would be imprudent to hold the car loan down payment exclusively in stocks because of the short term volatility of stocks. It would be equally imprudent to hold the retirement investment for 35 years exclusively in bonds because of the low returns of bonds in the long term. Bitcoin was first launched in 2009 and first used for an actual purchase in 2010. Thus, Bitcoin, and other cryptocurrencies, are very new types of investments. In the short time since that first cryptocurrency purchase, Bitcoin has increased in value from $0.30 per Bitcoin at the end of 2010 to $68,000 per Bitcoin today. This represents enormous short term returns. However, no one knows what the long term returns are going to be for Bitcoin and other cryptocurrencies. There simply is no precedent. Are cryptocurrencies a fad or are they the future of money?
• Short term volatility. Cryptocurrencies are unsuitable for short term investments given their volatility. In the past three and a half months (October 2025 to present), Bitcoin has lost nearly 50% of its value. Volatility is acceptable for investments held for long term but excessively risky when used for short investment horizon needs.
• Will cryptocurrency really be used as currency? When was the last time you bought a loaf of bread at the grocery store with Bitcoin? Or a hamburger at McDonalds? Or a tank of gas at an Exxon station? As with any kind of currency, its value is to be able to buy stuff and currently, cryptocurrency is rarely accepted as payment (unless you are a kidnapper, drug dealer, extortionist, or ransomware crook). Unless countries adopt Bitcoin or some other cryptocurrency as official legal tender, consumers are likely to prefer to use the national currency for most transactions.
• Cryptocurrency subdivisions are complicated. With a Bitcoin currently valued at around $60,000 per 1 Bitcoin, a pint of beer at your local pub would cost about 0.0001 Bitcoin. Americans are used to pricing in dollars and cents; Europeans are used to pricing Euros and cents; and British are used to pricing in pounds and pence. Would you prefer to see the price of a beer at $6 or at 0.0001 Bitcoin? Although there are Bitcoin denominations, they are foreign to most people: 1 Decibitcoin = 0.1 Bitcoin, 1 Centibitcoin = 0.01 Bitcoin, 1 Millibitcoin = 0.001 Bitcoin, 1 Microbitcoin = 0.001 Bitcoin, and 1 Satoshi = 0.00000001 Bitcoin.
• Cryptocurrency’s volatility creates excessive risk for retailers and consumers. The substantial daily and weekly swings in the value of Bitcoin and other cryptocurrencies creates enormous problems for those who sell goods and services. For example, let’s say you are a house painter and give a quote of 0.0452 Bitcoin to paint someone’s house but you are currently scheduling 2 months out. If the value of a Bitcoin drops by 20% in those 2 months, then you are going to lose money and go out of business pretty soon. On the other hand, if the value of Bitcoin increases by 20% over a 2-month period, then an employer who hires an employee with an annual contract to be paid 0.09482 Bitcoin each month could face an unsustainable increase in overhead expenses and go out of business. Retailers that carry an inventory of goods would need to change prices of goods on an almost daily basis to account for daily changes in the value of Bitcoin (i.e., the daily Bitcoin exchange rate). For businesses to be able to create workable budgets, they need to confidently predict the rate of inflation (or deflation) in the upcoming year. The same holds for individuals preparing household budgets. Volatility is a budget destroyer.
• Countries are unlikely to give up their own currencies. Governments like to control their own currencies. Great Britain refused to adopt the Euro even when it was part of the European Union. Similarly, Denmark and Sweden also have kept their own currencies rather than adopt the Euro. Each country’s central bank sets its own interest rates based on its own monetary policy. Each country has differing degrees of nation debt. Each country has different GDPs. Each country has differing economic performance, such as unemployment rates and productivity efficiency. Each country has different degrees of geopolitical stability,. And each country has differing trade balances. Because of these differences, the value of a Bitcoin or other cryptocurrency will vary from one country to another. In one country, a dozen eggs might cost 0.00001 Bitcoin but in another country, a dozen eggs might cost 0.000005 Bitcoin. By giving up its national currency, a country’s government loses economic control.
• Transactions take too much time. Cryptocurrencies can only reach maximum long term value if they become used as currency for most sales transactions. For Bitcoin transactions to be validated by miners and new blocks to be added to an existing blockchain requires about 1-hour on average. Each transaction requires multiple different miners to each perform independent validations. Each of those individual validations requires a great deal of complex computations. If the Bitcoin network is busy, there can also be long wait times in the validation queue that results in transactions taking several hours. In addition, each transactions results in a given blockchain becoming longer; as blockchains get longer, it takes more computer CPU to perform validation computations. This makes cryptocurrency, like Bitcoin, unsuitable for day-to-day transactions unless the cryptocurrency is associated with a credit card or a debit card.
• Cryptocurrencies cannot be used during power failures or internet outages. If there is a power failure after a storm or a hurricane, you can still buy supplies at your local hardware store using cash. If your internet service provider has an outage because a construction crew accidentally cut your regional fiberoptic cable, you can still buy a cup of coffee at your local coffee shop using cash. In fact, many small retailers only accept cash and do not accept credit cards because of their associated fees. Although the transaction validation fees charged by Bitcoin miners are relatively small, they can spike upward significantly during periods of network congestion. This could potentially result in dynamic pricing to accommodate these variable validation fees… and consumers do not like dynamic pricing, particularly for day-to-day purchases.
• Transaction validation uses an enormous amount of electricity. Currently, Bitcoin miners consume about the same amount of electricity as the entire country of Argentina every year. This electricity consumption will grow if more transactions occur every year. The only way to create this amount of electricity is to increase fossil fuel power plants or renewable energy sources. Many communities are already facing objections to building new data centers because of their excessive electricity consumption that increases the cost of electricity to everyone in the community. Limits on future electricity generation could pose a barrier to widespread adoption of cryptocurrencies for day-to-day transactions.
• If you lose your key, you lose your Bitcoin. The key is a 256-bit random number that functions as a “master key” or signature to unlock and spend your Bitcoin. It must be kept secret. If you lose that number, that Bitcoin is lost forever. If you store that number on a piece of paper in your home and there is a fire, you lose your entire investment. If that number is kept on your home computer and the computer is stolen, you lose your entire investment. If your number is hacked, you lose your entire investment. Stefan Thomas, a San Francisco programmer, famously lost a hard drive containing the keys for 7,000 Bitcoins – in other words, he lost forever the equivalent of $420 million. It is currently estimated that 20% of Bitcoin keys have been lost, essentially making those Bitcoins disappear. Bitcoins can be held in cryptocurrency exchanges, such as Coinbase, that offer a secure place to store your Bitcoin; however, exchanges charge fees for storage and transactions.
• Mainstream adoption of cryptocurrency is affected by politics. Political leaders can have a profound effect on whether cryptocurrencies become mainstream. For example, they can decide to accept a particular cryptocurrency as legal tender for paying taxes, paying for tickets to enter National Parks, etc. Conversely, politicians can deny mutual funds or ETFs from dealing in cryptocurrency. A single executive order can make or break a cryptocurrency,

The arguments for cryptocurrency as a retirement investment

For every ardent cryptocurrency skeptic, there is an equally passionate cryptocurrency advocate. Here are some of the reasons cryptocurrency proponents cite for why people should invest in cryptocurrency:

• The number of Bitcoins is capped. Currently, 19.9 million Bitcoins have been created. The maximum number that can be eventually mined is 21 million. That means that 95% of Bitcoins have already been mined. As a result, the more people use Bitcoins, the more valuable they become. It is sort of like the opposite of inflation – an automobile costing 1 Bitcoin today might cost 0.5 Bitcoin a year from now if Bitcoin replaces traditional currency. As the demand for Bitcoins increases in order to complete more and more transactions, then if there is a finite number of Bitcoins in existence, the value of each Bitcoin will rise. Because of this, the value of Bitcoin will steadily increase as it is used for more and more transactions.
• Over time, many Bitcoins are irretrievably lost. If you lose your bitcoin key, that Bitcoin is gone forever and no one will ever be able to use it. Just like pennies and dollar bills, over time, a certain percentage of them become lost and go out of circulation. Since there are a maximum of 21 million Bitcoins, as some Bitcoin keys are inevitably lost each year, there will be fewer and fewer Bitcoins in circulation, thus increasing the value of those remaining Bitcoins.
• Cryptocurrency cuts out the middlemen. An advantage of cryptocurrency is that it eliminates banks as middlemen for various transactions. In addition, cryptocurrency operates outside of government control, making it immune to monetary policy meddling by governments.
• It is taxed at your capital gains tax rate rather than your income tax rate. When you sell a Bitcoin, any profits you make are taxed at your capital gains tax rate, as long as you have held that Bitcoin for more than one year. For the vast majority of Americans, the capital gains tax rate is lower than their income tax rate. Unless you have a very low income or a very high income, that capital gains tax rate is 15%.
• It is extremely portable. You can take your cryptocurrency across national borders with ease. This makes it efficient for someone sending money back home to their family in Costa Rica and also makes it easy for someone fleeing the U.S. to move all of their assets out of the country without being taxed or having their accounts frozen.
• Diversification. The value of cryptocurrency is affected by different forces than those that affect the value of other investments, such as stocks or bonds. However, cryptocurrency is new enough that the factors that influence its value have not been fully determined. Nevertheless, it provides diversification that may protect investors during periods of stock and bond market decline.

So, what is a retirement investor to do?

The future value of cryptocurrency depends entirely on whether its use for transactions increases. If so, then the value of cryptocurrencies, such as Bitcoin, will increase and likely increase a lot. On the other hand, if cryptocurrencies fail to be used for future transactions, then they will have little or no future value. In that sense, buying and holding cryptocurrency is more speculation than investing. Cryptocurrency will either be a boom or bust as a long term investment. There are so many variables that will affect whether cryptocurrency goes mainstream that it is impossible to confidently predict the future of cryptocurrency. Twenty years from now, either cryptocurrency’s advocates or naysayers will be saying “I told you so” but no one knows which group it will be.

A third possibility is that cryptocurrency continues to be used for a some transactions and as a means of transferring money from one individual to another. In this regard, cryptocurrency is a great way to launder money if you are a criminal or to avoid taxes on money transfers if you don’t want the IRS to know about the transfer. It is far easier for a drug cartel to charge a few hundred Bitcoin for a shipment of cocaine than to try to figure out how to move a pallet of $20 bills across the border.

If you do decide to include Bitcoin or some other cryptocurrency in your retirement portfolio, it should be a relatively small percentage, 1% – 5%. If cryptocurrency has future widespread adoption, that small percentage will be worth a fortune in 10 or 20 years. If cryptocurrency does not become widely used for ordinary transactions in the future, then a total loss of only a small percentage of one’s investment portfolio will not result in a significant loss of one’s total assets. If Bitcoin does not go mainstream but continues to be used by drug dealers and ransomware criminals, then you probably won’t make a fortune on your Bitcoins but you probably won’t lose your initial investment, either.

February 22, 2026

Traditional retirement investments consist of 5 types of holdings: U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, and real estate. But in reality, you can put any kind of holdings in your retirement portfolio, from fine art to cryptocurrency, from pork belly futures to stamp collections, and from collectible sneakers to gold. But should you?

As an investment, gold has recently received a lot of attention because it has increased in value by 162% in the past 2 years. At the same time, the S&P 500 stock index increased by 24%. The graph below shows how an investor would have performed by investing $2,000 in either gold or the Vanguard Total U.S. Stock Index Fund (VTSAX) in January 2024 through January 2026.

Based on the returns for gold during the past 2 years, it looks like a great investment. But is it really and is now a good time to invest in gold?

Gold as an investment

For hundreds of years, gold was treated as a form of money. Until the Great Depression, the United States tied its currency to the value of gold, the so-called “gold standard”. But today, you cannot pay for your groceries or pay your rent using gold. Gold’s value is because of its value as a commodity.

A commodity is a raw material or primary agricultural product that can be bought and sold on a commodities market. Commodities include things like wheat, corn, copper, crude oil, and gold. Commodities can typically be consumed or made into a product that can then be sold. Wheat can be made into flour, crude oil can be made into gasoline, and gold can be made into jewelry. As an investment, gold is unique among commodities because it does not spoil if you hold it too long (unlike wheat or corn) and it is small enough that the average person can keep it in a safe at home or in a safe deposit box at a bank (unlike crude oil or copper). Because of these qualities, gold (and other precious metals) can serve as a long term investment for the average person.

There are many factors that can affect the price of gold. Gold is considered to be a safe haven asset, meaning that in times of geopolitical instability, gold is generally considered to hold its value better than the currency of unstable countries. Thus, when there is geopolitical tension, the price of gold usually increases. During periods of economic uncertainty, the central banks of countries buy gold as a hedge agains uncertainty and this can further drive up the price of gold as demand increases. Gold is viewed as a hedge against inflation so when the rate of inflation increases, the price of gold increases. Also, when the value of the U.S. dollar falls, the price of gold in the United States increases. Interest rates can additionally affect the price of gold – when bond interest rates increase, the price of gold decreases since unlike bonds, gold does not pay out annual interest or dividends, making bonds more attractive to investors than gold.

In the long term, stocks outperform gold

Since 2000, gold has outperformed stocks but over a longer period of time, stocks have outperformed gold. The table below shows the current value of $1 invested in either gold or stocks, assuming that stock dividends are reinvested.

One the surface, it appears that gold is the better investment over the past 25 years. However, if you compare the returns from gold versus the S&P 500 between 2000 and 2019, those returns are similar – most of gold’s increase in value has occurred in the past 6 years, related to the COVID pandemic, geopolitical instability related to the wars in Ukraine and Israel, and more recent global economic instability related to tariffs and the falling value of the U.S. dollar. The risk of gold today is that it may be overvalued – easing of geopolitical tensions and greater global economic certainty could result in gold falling in value in the future.

In the short term, gold is highly volatile – even more volatile than stocks. This makes it a poor choice for short term investing. Thus, the role of gold in a retirement portfolio should be as a long term investment.

How do you invest in gold?

The most direct way to invest in gold is to purchase gold bars or gold coins. However, this means that you need a secure way to store it, such as in a safe at home or in a safe deposit box in a bank. Even with seemingly secure storage, physical gold can be subject to theft. Buying gold bars or coins from a gold dealer also requires paying a commission – generally 1% to 5% of the purchase price. These commissions are not reflected in graphs showing an increase in the price of gold and these commissions can significantly erode investment returns. Additionally, secure storage can add costs that can further erode the overall return on investment in gold. To summarize – the cost of buying, storing, and selling physical gold can negate a lot of the returns from increases in the price of gold as a commodity.

Physical gold can also be held in an IRA for retirement. However, there are specific IRS rules about gold IRAs. For example, the gold must be stored in an IRS-approved third party storage facility – you cannot store gold in a bank safe deposit box if that physical gold is in an IRA. The IRS also requires that the gold in a gold IRA be purchased by an IRS-approved custodian and that the gold bullion be IRS-approved (> 99.5% purity). Fees paid to the custodian to buy and sell gold in the IRA and fees paid to the storage facility to store and insure the physical gold in the IRA can significantly erode the returns from investment.

An alternative to physical gold is to purchase shares of a gold mutual fund or gold ETF where the fund then holds the physical gold in a secure location. Gold ETFs have expense ratios of around 0.40%, which is considerably cheaper than the commissions paid when buying physical gold from a gold dealer. In addition, the ETF expense ratio also covers the cost of storaging and insuring the physical gold that is held by the ETF. When compared to a gold IRA, having a gold ETF in your regular traditional or Roth IRA is much less costly and avoids the rather high custodian fees, storage fees, and dealer mark-ups associated with gold IRAs.

Lastly, you can buy shares of stock in gold mining companies; however, this poses additional risk since the companies can lose value from operational problems, poor management, or political upheaval in the country where the mine is located – even as the value of physical gold as a commodity is increasing.

So, should you have gold in your retirement investment portfolio?

Gold’s volatility makes it a poor choice as the main component of a retirement portfolio. However, as a minor component, it can serve an important role as a hedge against inflation and hedge against falling purchasing power of the U.S. dollar. Gold usually (but not always) increases in value when bonds decrease in value. Sometimes gold will also increase in value when stocks decrease in value. In a retirement portfolio, this gives the retiree the ability to strategically draw from gold investments during months or years that stocks or bonds have fallen in value.

Whether to have gold in your retirement investment portfolio and what percentage to have will depend on several factors:

• Comfort with investment risk. The percentage of one’s retirement investment portfolio invested in gold will depend on one’s personal degree of risk aversion. As an example, someone who is risk averse from an investment standpoint may want to have no retirement holdings in gold whereas someone who is comfortable with investment risk may want to have as much as 5% of the portfolio invested in gold.
• Years until retirement. As with any volatile investment, the closer one is to retirement age, the lower the percentage of volatile investments one should have in their retirement portfolio. There is too great of a risk that gold could lose significant value in the short term and if an investor is dependent on gold to provide a large percentage of their annual retirement income, then that investor could need to draw from the gold investment at a time when it has lost value. It is unwise to make a large new investment into gold a year before retiring.
• Projected annual retirement income to living expense ratio. The closer a retiree’s annual income from investment is to their basic living expenses, the lower the percentage of volatile investments should be in their portfolio. The danger is that if there is a fall in value of a volatile investment in any given year, the retiree may have to withdraw a greater amount of their total portfolio to pay the bills and risk running out of money later in life. On the other hand, if the annual retirement income is considerably greater than annual basic living expenses, then the retiree can simply reduce discretionary spending for a year or two when volatile investments fall in price and thus preserve total investment portfolio value for the future.
• Life expectancy after retirement. A longer life expectancy from the year that one retires means a longer investment horizon for retirement investments. The longer the investment horizon, the more volatility and risk the investment portfolio can withstand since some of that investment can be considered long term. On the other hand, if one anticipates a relatively short life expectancy after retirement, then the portfolio should predominately contain low risk, non-volatile investments since they will all be short term investments. Factors that can affect life expectancy after retirement include one’s age when retiring, the presence of any chronic diseases, whether one smokes, whether one is obese, and how long one’s parents and grandparents lived.
• The amount of one’s Social Security benefit or pension. Social Security and pensions are considered fixed income sources – they may keep up with inflation but they do not increase in value above inflation. The advantage of a fixed income component in one’s retirement portfolio is that it serves as a financial buffer during times when stock, bond, or gold investments drop in value. The larger one’s annual fixed income, the greater risk and volatility one can tolerate with other retirement investments. On the other hand, someone with no pension and a relatively small Social Security benefit cannot tolerate excessive volatility in their investment portfolio and gold would be a poor choice.
• One’s opinion about the future. No one can predict if the U.S. or other major powers will become enmeshed in a future war. No one can predict whether future U.S. policies will result in a fall in the value of the U.S. dollar. No one can predict when the next surge in U.S. inflation will occur. No one can predict when the surging federal deficit will reach the tipping point and cause a new wave of U.S. austerity. If you are a pessimist about the economic and geopolitical future, then a higher percentage of gold in your retirement investment portfolio is warranted. If you are an optimist about the future, then a lower percentage of gold would be more appropriate.

When should you buy gold for your retirement investment portfolio?

The general rule of investing is to “buy low and sell high”. One of the challenges is that you never know if the price of any investment is going to go up or going to go down in the future. However, understanding the factors that affect the price of gold can provide some direction to the investor. Historically, the best time to buy gold has tended to be during periods of low inflation, rising interest rates, geopolitical stability, a strong U.S. dollar, and U.S. policies fostering economic stability. These are times when the price of gold is relatively cheap. On the other hand, the worst time to buy gold is during periods of rising prices, falling interest rates, geopolitical turmoil, a weakening U.S. dollar, and U.S. economic uncertainty. These are times when the price of gold is relatively expensive.

My personal opinion is that we are currently in the latter times. Inflation has proven to recently be sticky with tariffs increasing consumer prices. Although interest rates remain high, they appear to have crested, with gradual reductions over the past year. We are currently experiencing tumultuous geopolitical events with the persisting Ukraine war, U.S. involvement in Venezuela, U.S. posturing toward Greenland, and political instability in Iran. The U.S. dollar has weakened approximately 10% over the past year, largely as a result of U.S. tariffs, federal government shutdowns, and perceived threats to the autonomy of the U.S. Federal Reserve. There is considerable economic uncertainty with threats of even greater tariffs that can result in higher inflation, the increasing federal deficit, the impending exhaustion of the Social Security Trust Fund, and the realignment of traditional U.S. trading partners resulting from “America first” policies.

Should you have a gold component in your retirement investment portfolio? Yes, it can be an important diversification component that will strengthen an investment portfolio. But I believe that now is not the time to buy gold for one’s retirement investment portfolio. Instead, now is the time to be selling gold that you already have in your investment portfolio. Then wait until the various factors historically associated with lower gold prices emerge and then buy gold bars, gold coins, gold ETFs, or gold mining company stocks. Avoid gold IRAs since they have excessively high expenses – if you want a gold component in your IRA, then buy shares of a gold ETF instead.

Because there is no way to know when gold (or any other investment) has bottomed out in price, a good strategy for buying gold is dollar cost averaging. That is, buying small amounts of gold every month or so over a long period of time. Then rebalance your portfolio every year by buying or selling gold to maintain whatever the desired percentage of your total investment portfolio you have decided should be invested in gold, generally 10% or less. As an investment, gold may look hot today, but that just means that you should have bought it 5 years ago.

February 3, 2026

Most people are familiar with the annual contribution limits to tax-deferred retirement plans. But many employers now offer an additional way to contribute to 401(k) and 403(b) plans that allows employees to save even more of their income for retirement. And I think this is a great opportunity.

Understanding tax-deferred 401(k), 403(b), and 457 plans

Tax-deferred retirement plans are offered by employers as a way for employees to elect to set aside a portion of their income for retirement. These contributions are tax-deferred meaning that you do not have to pay federal income tax on the contributions for the year that you contributed them to your 401(k), 403(b), or 457 plan. Instead, you pay federal income tax on the withdrawals in your retirement years.

A 401(k) plan is a tax-deferred retirement plan offered by for-profit companies. A 403(b) is a similar plan offered by non-profit companies or organizations. And a 457 is a similar plan offered by government institutions. They are all identical except that 401(k) and 403(b) plans are subject to an IRS penalty if you take withdrawals before age 59 1/2 whereas 457 plans do not have an early withdrawal penalty. A traditional IRA is similar but can consist of either tax-deferred contributions or post-tax contributions. When an IRA is created from only tax-deferred contributions (and no post-tax contributions), it is virtually identical in practice to a 401(k) or 403(b) plan.

Understanding Roth 401(k), 403(b), and 457 plans

In a Roth plan, you pay federal (and usually state) income tax on the contributions during the year that you made those contributions. In retirement, you pay no income tax on the withdrawals. Some employers will only offer tax-deferred 401(k), 403(b), or 457 plans but many will give the employee the option of either contributing to a tax-deferred 401(k), 403(b), or 457 plan or contributing to a Roth 401(k), 403(b), or 457 plan. Later in this post, I will discuss who should contribute to a tax-deferred plan and who should contribute to a Roth plan.

The 2026 contribution limits for 401(k), 403(b), and 457 plans

Each year, the federal government sets limits to the amount that an employee can contribute to a 401(k), 403(b), or 457 plan. That limit varies by the employee’s age. For 2026, contribution limits are:

• $24,500 for employees younger than age 50
• $32,500 for employees age 50 – 60 and older than age 63
• $35,750 for employees age 60 – 63

In addition, the IRS allows employers to contribute to 401(k) and 403(b) plans. These employer contributions are considered separate to the employee contributions and are often offered as “matching” contributions. Combined, the employee contributions plus employer contributions cannot exceed a total of $72,000. Not all employers will offer matching contributions and those that do often limit the amount that they will match to just a few thousand dollars. As a result, very few 401(k) or 403(b) plans reach the $72,000 total contribution limit.

The 403(b) & 401(k) after-tax with an after-tax Roth conversion option

In 2025, many companies and organizations began to offer employees the option of contributing more money into a 401(k) or 403(b) plan by using an after-tax with an after-tax Roth conversion. Here is how it works. First, the employee must make their age-determined maximum annual contribution to their 401(k) or 403(b) plan. So, for an employee younger than age 50, that would mean $24,500 in 2026. Next, the employee contributes post-tax income into a 401(k) or 403(b) plan and immediately converts that money into a Roth 401(k) or 403(b) plan. Importantly, the conversion must be done immediately, before those after-tax contributions have a chance to earn any money on investments in the regular 401(k) or 403(b) plan; otherwise, those earnings would be subject to additional income tax when converted to the Roth 401(k) or 403(b) plan.

The maximum amount that the employee can contribute to an after-tax with an after-tax Roth conversion 2026 is $47,500. For example John Smith is 40-years-old and works for State University. He makes his maximum contribution to his regular 403(b) of $24,500. He can then make an additional $47,500 after-tax contribution with an after-tax Roth conversion. His total contribution is $24,500 + $47,500 = $72,000. On the other hand, Jane Brown is 61-years-old and also works at State University. She makes her age-adjusted maximum contribution to her regular 403(b) of $35,750. She can then make an additional $47,500 after-tax contribution with an after-tax Roth conversion. Her total contribution is $35,750 + $47,500 = $83,250.

Tax-deferred 401(k) & 403(b) versus Roth 401(k) & 403(b): which is better?

If your employer gives you the option of either contributing to a regular tax-deferred 401(k)/403(b) plan or contributing to a Roth 401(k)/403(b) plan, you have to make a decision about whether it is better to pay income tax now or pay income tax in retirement. The guiding principle is to contribute to a Roth plan when your income tax rate is lower than it will be in retirement. Conversely, contribute to a tax-deferred plan when your income tax rate is higher than it will be in retirement.

A Roth 401(k) or 403(b) plan is better if:

• You are younger. It is better to pay income tax on 401(k) or 403(b) contributions when your federal income tax rate is lowest. For most people, this is early in their careers when their annual income is relatively low compared to where it will be later in life. Your financial goal should be to have enough retirement savings so that your taxable income (and thus income tax rate) is higher in your retirement years than it is in your earliest working years (when your taxable income is relatively low).
• You have a shortfall in income. Similarly, if your annual income is disrupted by being out of work for a few weeks or a few months, then your income that year will be relatively low and that will translate to having a relatively low federal income tax rate that year.
• You anticipate a big increase in income in the future. Let’s say you are an architect and have been working as an associate for the past 10 years. The firm typically promotes architects to partner status after 15 years. Partners make double the income as associates so it would be better to pay income taxes on your 401(k) contributions now, while your income (and consequently income tax rate) is low. There are many reasons why your income could rise in the future – maybe you anticipate a big promotion in the upcoming years, maybe you own your company and plan on selling in a few years, or maybe you are working part-time and planning on increasing to full-time in a few years. Any of these situations could result in you having a lower taxable income today than you will in your retirement years.
• You are planning a one-time big contribution to a charity this year. Maybe your congregation is planning on building a new church. Or maybe the Red Cross has an urgent appeal for donations due to a natural disaster. For whatever reason, if you anticipate making a very large contribution to charity in any given year, and if you itemize deductions on your federal income tax form, then that charitable contribution will lower your taxable income for that year. As a result, you are better off contributing to a Roth retirement account instead of a tax-deferred retirement account the year that your taxable income is low, making your income tax rate low.
• You believe that the federal government will raise income tax rates in the future. We are currently living in an era of historically low federal income tax rates. However, income tax rates are like a pendulum that swings back and forth every few years. Americans will complain about high income taxes and vote in politicians who cut income tax rates and reduce government services. A few years later, Americans realize that the government is no longer providing the services that Americans want and then vote in politicians who raise income taxes in order to expand services. What the income tax rates will be when you are retired is anyone’s guess but if you personally think that they will be higher in your retirement, then it is better to contribute to a Roth 401(k) or 403(b) while income tax rates are still low.
• You don’t think you will live very long. Maybe you smoke a pack of cigarettes a day, are obese, and are an anti-vaxxer. The bad news is that you probably will have a relatively short life expectancy in retirement. The good news is that you will be able to withdraw a lot of money from your retirement accounts each year in retirement because that retirement account does not need to last very long. That means that you could be in a higher income tax bracket in retirement than you were when you were working so contributing to a Roth retirement account would make sense.
• You plan on working into your 70’s. Similar to the person who does not think they will live very long, a person who does not plan on retiring until they are in their 70’s or 80’s will have fewer years that they will have to depend on the money from their retirement accounts and this means that they will likely have a relatively high income once they start taking the money out of those accounts. It is better to contribute to a Roth account when working and have a lower taxable income and thus a lower federal income tax rate. Also keep in mind that at age 73, the IRS mandates that you take required minimum distributions from your tax-deferred IRA, 401(k), 403(b), or 457 plan and this means that your taxable income could increase dramatically at age 73 if you also have regular income from working at that age. Roth accounts are not subject to required minimum distributions at age 73.

A tax-deferred 401(k) or 403(b) plan is better if:

• You are older. Most people have their highest earning years when they are older, generally in their 50’s. If this is the case, then you are better off making tax-deferred 401(k) or 403(b) contributions now and then taking money out of that tax-deferred 401(k) or 403(b) in retirement when you have a lower taxable income and thus a lower federal income tax rate. The additional benefit is that those tax-deferred contributions lower your taxable income in the year that you make those contributions and that means that you will have a lower effective income tax rate.
• You anticipate a fall in your annual income in the future. Maybe you think that artificial intelligence is going to eliminate your job. Or maybe you think that the factory that you work at will be going out of business. Or maybe you just want to cut back to working part-time once you reach age 55. You’re likely going to have a higher taxable income now than you will in retirement so you are better off making tax-deferred contributions today, before the anticipated fall in your annual income.
• You just inherited a tax-deferred IRA, 401(k), or 403(b). Usually, if you inherit a tax-deferred retirement account from a newly deceased relative, you are required to withdraw all of the money from those accounts within 5 years. Those withdrawals are considered taxable income on your federal income tax returns so they will make your total taxable income higher and thus put you in a higher federal income tax bracket with a higher effective income tax rate. You are better off contributing to your own tax-deferred 401(k) or 403(b) plan when you are taking the required distributions from the inherited tax-deferred retirement plan. This allows you to offset the increase in your taxable income from the inherited retirement account withdrawals with the decrease in your taxable income from the contributions to your own tax-deferred retirement account.
• You just inherited an annuity (maybe). Inherited annuities (and IRAs) can be complicated. They sometimes consist of both a taxable component and a non-taxable component. They are also usually subject to the requirement that all of the money be withdrawn within 5 years of inheriting them. If an annuity (or IRA) consist of both taxable and non-taxable components, then the annuity company will likely make you withdraw the taxable component first and then withdraw the non-taxable component later. So, if half of the annuity is taxable and half is not-taxable and you withdraw the annuity over 4 years, you’ll pay income taxes on the withdrawals during years 1 & 2 and you will not pay income taxes the withdrawals during years 3 & 4. Therefore, you are better off contributing to your own tax-deferred 401(k) or 403(b) during years 1 & 2 in order to lower your total taxable income (and thus income tax rate) during those years. Importantly, anytime you inherit an annuity or IRA, make sure that you ask the insurance company or financial institution holding that annuity or IRA about whether or not all of the withdrawals are taxable and if not, which years’ withdrawals will be taxable and which years’ withdrawals will be tax-free.
• You think you will live very long. The longer your life expectancy in retirement, the more years your retirement savings will have to last. That means that you will likely have a relatively lower taxable income every year in retirement. Lower annual income means a lower income tax rate. Therefore, you may be better off with a tax-deferred retirement account so that you pay income taxes when your income tax rate is lower than it was when you were working.
• You believe in a zombie apocalypse. If you think that the world is going to end about the time you turn 65 or if you think that world is going to turn to bitcoin and U.S. dollars will be worthless in the future, then why pay income taxes on Roth contributions during your working years. For that matter, why contribute to a retirement account at all? The problem is that if the zombie apocalypse never happens, then you’ll be living in a homeless shelter and eating cat food once you retire if you haven’t saved.

So who should contribute to a 403b & 401k after-tax with an after-tax Roth conversion?

Anyone who has enough income to contribute the maximum to their 401(k) or 403(b) plan ($24,500 in 2026 for those younger than age 50) should think about making additional after-tax contributions to a 401(k) or 403(b) with an after-tax Roth conversion. The reality is that contributing $24,500 to your retirement account every year is pretty darn good. Assuming an average annual return of 8%, working for 35 years, and then withdrawing 4% out of your retirement account every year, you would have an annual income in retirement of $196,000! But when you factor in inflation at 3% per year, that $196,000 is equal to only $69,000 in today’s dollars. If you add in the average Social Security benefit of $24,000 per person, this adds up an annual retirement income of $93,000 if you are single and $117,000 if you are married. If you are planning on doing a lot of traveling in retirement or maybe buying a second home or buying a boat in your retirement years, then $93,000 a year may not be enough.

Contributing to a 401(k) or 403(b) with an after-tax Roth conversion is always better than investing money in a regular brokerage account if you are investing for retirement. You will have to pay capital gains taxes on the earnings from those brokerage account investments whereas you won’t pay any taxes on the earnings in your Roth account. So, if you have the money to make additional retirement savings, contribute to a 401(k) or 403(b) with an after-tax Roth conversion.

Some organizations offer their employees both a 403(b) and a 457. An example would be a public university that is considered to be both a state government institution and a nonprofit institution. In this case, an employee can contribute the maximum to both the 403(b) and the 457 plans for a total of $49,000 in 2026. This would result in an annual retirement income of $138,000 in today’s dollars. Add in Social Security and that results in $162,000 if you are single and $186,000 in today’s dollars if you are married. This is a lot of money but if your taxable income is currently $350,000 a year when you are working, you will be looking at a drop in income in retirement.

For physicians, the picture gets more complicated. Most doctors are about 30-years-old when they finish a 3-year residency and about 33-years old if they do a fellowship after that. The AMA reports that 42% of physicians retire before age 65. So physicians often have fewer working years to contribute to retirement savings than other workers. Fewer years investing for retirement means fewer years for compound interest to work its magic on your investment. Factor in an average medical school loan debt of $220,000 and physicians often contribute relatively less of their income to retirement early in their careers and need to catch-up in their 40’s and 50’s. For these mid-career and late-career individuals, contributing to a 401(k) or 403(b) with an after-tax Roth conversion can make a lot of sense.

As a retired physician, I cannot overemphasize the importance of having a balanced retirement portfolio that consists of both tax-deferred retirement accounts and Roth accounts. This allows for strategic withdrawal from both types of accounts each year in order to avoid having to pay excessive income tax. That way, you can preferentially withdraw from your Roth accounts during years when you have a lot of expenses and need a lot of money (such as travel or purchasing a second home) in order to avoid having a high taxable income that year that would cause your effective income tax rate to be high. On the other hand, you can rely on just your tax-deferred accounts in years when you have fewer expenses and do not need to withdraw as much money.

Retirement plan contribution strategy

If your employer offers a match to your 401(k) or 403(b). Figure out a way to at least contribute enough to maximize the match. This is free money and you should never turn down free money. So, if your employer will match up to $3,000 to your 401(k), contribute at least $3,000 yourself so that you can get the full additional $3,000 from your employer.

If your employer offers only a tax deferred 401(k), 403(b), or 457. You don’t have a choice – you can only make tax-deferred contributions up to the maximum that the IRS permits for your age. But, you can still contribute to a Roth IRA. If your income is less than $150,000 filing single or less than $236,00 married filing jointly, then you can contribute directly to a Roth IRA. If your income is higher than this, you can contribute after tax money into a traditional IRA and then immediately convert it to a Roth IRA (the so-called “backdoor” Roth IRA). In 2026, the IRA contribution limits are $7,500 for those under age 50 and $8,600 for those older than age 50.

If your employer offers you the choice of either a tax-deferred or a Roth 401(k), 403(b), or 457. In this situation, you have to decide whether you are better off with the tax-deferred option or the Roth option. Which option is best for you may change for any given year. For example, the Roth option may be better early in your career when your taxable income is lower and then the tax-deferred option may be better later in your career when your taxable income is relatively higher.

If your employer offers a 401(k) or 403(b) after-tax with an after-tax Roth conversion. First, assuming you are younger than age 50, decide whether your initial $24,500 contribution should go to a regular tax-deferred 401(k)/403(b) plan or a Roth 401(k)/403(b) plan. Then determine how much of your post-tax income you can afford to contribute to an after-tax 401(k) or 403(b) plan with an after-tax Roth conversion. Keep in mind that the maximum after tax contribution with after-tax Roth conversion is $47,500 per year.

If your employer offers both a 403(b) and a 457. This is common for public university employees. It opens up more options but also adds a layer of complexity. First, decide whether your initial contributions should be to a tax-deferred or Roth 457 (if your employer gives you a choice). Second, maximize your contributions to the 457 plan since unlike the 403(b), the 457 withdrawals are not subject to early withdrawal penalties if you retire before age 59 1/2 and need to tap into your retirement account. Third, after maximizing your 457 contributions, contribute to the 403(b) up to the age-determined maximum. Fourth, if your employer allows post tax contributions with an after tax Roth conversion, contribute up to $47,500 in post tax 403(b) contributions with an after tax Roth 403(b) conversion. This strategy allows employees younger than age 50 to put away a total of $96,500 in their retirement accounts each year. This would result in a whopping annual retirement income of $750,000, equal to $270,000 in today’s dollars.

If you have contributed the maximum to your 401(k), 403(b), or 457 plan(s). For money that you know you will be investing for retirement, first contribute to a post tax traditional IRA and then do an immediate conversion to a Roth IRA (the backdoor Roth IRA). Avoid making post tax contributions to a traditional IRA and leaving it in that traditional IRA because you will have to pay regular income tax on the earnings when you take the money out in retirement. After contributing the maximum to a backdoor Roth IRA, invest any additional money into a regular brokerage account. You will have to pay capital gains taxes on these investments but your capital gains tax rate will usually be less than your regular income tax rate.

If you have a side hustle. Many employees have self employment income in addition to their income from their employer. Maybe you are a weekend artist and sell your paintings. Maybe you are a university professor but do some outside consulting in your spare time. Or maybe you play in a band on Friday and Saturday nights. You can contribute up to 20% of your self-employed income to an SEP (simplified employee pension) with a maximum annual contribution of $72,000. SEP contributions are tax-deferred so they will decrease the adjusted gross income from your self employment income. If you have income that is on your IRS schedule C form, then you can contribute to an SEP.

Americans do not save enough for retirement

A goal of financial planning is to ensure that you have enough to fund your desired lifestyle in retirement. For most of us, that means having at least as much disposable income each year in retirement as we have during our working years. Ideally, we should have a greater annual disposable income when we are retired so that we can do all the fun things we’ve dreamed of doing when we were working. We want to be able to travel, to take up new hobbies, to renovate our kitchens, to buy an RV – and all that takes money. It takes gold to make our golden years golden.

But an AARP survey found that 20% of Americans over age 50 have no retirement investment savings. These individuals will have to survive on Social Security alone in their retirement. A recent Gallup poll found that 55% of Americans do not believe that they will be financially comfortable in retirement. With the decline in the number of companies that offer traditional pensions, it is increasingly up to individuals to take responsibility for their own retirement savings. This means taking advantage of 401(k), 403(b), and 457 plans when available. The new option of after-tax contributions with after-tax Roth conversion that many employers are now offering for their 401(k) and 403(b) plans now makes it easier for Americans to save enough to fund their retirements.

December 15, 2025

This spring, I will reach Social Security’s “normal full retirement age” of 66 years 8 months and so the timing of when to take Social Security benefits is on my mind. Every American approaching age 62 has to make an irrevocable decision that can have a profound impact on their retirement finances. Should one start taking Social Security benefits at age 62, age 70, or somewhere in-between? The current “normal” Social Security retirement age is 66 years 8 months. If you start taking your Social Security benefits before that age, the amount of your annual benefit is reduced. If you wait until you are older than 66 years 8 months, then the amount of your annual Social Security benefit increases. The earliest a person can start taking Social Security is age 62 and the latest is age 70. The optimal age to take Social Security depends on how long you expect to live and if you start taking Social Security early, whether you spend that money or invest it. In this post, I will go through the calculations to help you make the best decision for you personally.

• If you live to be older than 79.7-years-old, you are financially better off to wait to take Social Security at age 70 than take it at age 62 and spend the money.
• If you live to be older than 82.4-years-old, you are financially better off to wait to take Social Security at age 70 rather than at age 66 years 8 months and spend the money.
• If you live to be older than 84-years-old, you are financially better off to wait to take Social Security at age 70 rather than take it at either age 62 or age 66 years 8 months if you invested the annual benefits rather than spent them.
• Because of their longer life expectancy, women benefit more than men by waiting to take Social Security at age 70.
• There are several other variables that you should consider when deciding when to take Social Security benefits.

Some assumptions

All too often, financial pundits make overly simplistic opinions about the best age to start taking Social Security without factoring in the effects of inflation, the annual Social Security cost of living increase in benefits, and the return on investment if a person takes Social Security early and invests all of the money from those benefits. Before we go through the math, let’s make some assumptions.

In order to qualify for Social Security, an American must work and pay Social Security taxes for 40 quarters. In other words, you have to work for at least 10 years. The amount of your Social Security benefit is based on your average inflation-adjusted income during your working years. However, this is only your income subject to Social Security tax. In 2024, the maximum income subject to Social Security tax was $168,600. If you made $200,000, you only paid Social Security tax on $168,600 and you did not pay Social Security tax on the remaining $32,000. Therefore, the highest income that Social Security will use in calculating your benefit will be $168,600. For the calculations below, we will assume that a person turning 62-years-old this year (2025) will retire and stop working full-time and also assume that in 2024, this person had an income of $168,600 or more. That person’s annual Social Security benefit would be:

• $29,124 per year if Social Security starts at age 62 years
• $40,680 per year if Social Security starts at age 66 years 8 months
• $51,300 per year if Social Security starts at age 70 years

By law, Social Security benefits increase each year based on inflation. Specifically, benefits increase the same amount as the consumer price index (CPI) increases. Historically, the CPI has increased by an average of about 2.5% per year and thus Social Security benefits have also increased by an average of about 2.5% per year. This means that a retiree will have exactly the same buying power from their Social Security check every year for the rest of their life.

A final assumption pertains to life expectancy. Based on the Social Security Administration’s actuarial tables, on average, a 62-year-old man will live to age 91 and woman to age 94. At age 66 years 8 months, a man will live to age 93 and woman to age 95 on average. At age 70, a man will live to age 94 and woman to age 96 on average. But these are averages for all Americans – if you are a 62-year-old man who smokes, is obese, and has diabetes, then it is unlikely that you will live to age 91.

Scenario #1: You take Social Security benefits early and spend them

Using our hypothetical 62-year-old who had $168,600 of income in 2024 and retires in 2025, by the time this person turns 70-years-old, that total benefit would be $260,791 ($29,124 per current year x 8 years with 2.5% annual cost of living increase). But if that person had waited to start taking Social Security at age 70, the annual benefit would be $62,504 ($51,300 per current year with 2.5% annual cost of living increase). Because of this increase in the annual benefit by waiting until age 70, in 9.7 years, the person waiting until age 70 will have made up the difference in total Social Security benefits compared to the person taking Social Security at age 62. In other words, if the person waiting to start taking Social Security until age 70 lives to age 79.7-years-old, then they come out financially ahead of the person taking Social Security early.

Now let’s use the same calculations for a person waiting to start taking Social Security benefits until age 70 instead the normal full-retirement benefit at age 66 years 8 months. In this case, the person who delays taking Social Security benefits until age 70 would need to live to age 82.4 to come out financially ahead of the person who starts taking Social Security at age 66 years 8 months.

The bottom line is that if you live longer than age 79.7-years-old, you are better off delaying Social Security until age 70 rather than taking it at age 62. If you live longer than age 82.4, then you are better off delaying Social Security until age 70 rather than taking it at age 66 years 8 months. Because the actuarial life expectancy at either age 62 or age 66 years 8 months is considerably older than this, most Americans are financially better off taking Social Security at age 70 rather than taking benefits at an earlier age and then spending those benefits.

Scenario #2: You take Social Security benefits early and invest them

A commonly held belief is that if you take your Social Security benefits starting at age 62 and invested the money rather than spending it, you will be financially better off than if you wait until age 70. It turns out that this is not true – at realistic investment returns, you are still better off waiting to start taking benefits at age 70.

Once again, let’s use our hypothetical 62-year-old retiring this year and earning an income of $168,600 in 2024 and starts taking Social Security benefits now, at age 62. But instead of spending the money, he invests it until age 70. At age 70, he withdraws enough of his invested money each year to equal the amount of the annual benefit he would have received if he waited to start Social Security at age 70. Let’s look at how much money he would have at age 70 if he got investment returns of 2%, 3%, 4%, 5%, 6%, 7%, or 8% per year. We will again assume an average annual inflation rate of 2.5% and an average cost-of-living increase in Social Security benefits of 2.5% per year.

The table below shows that even with an exceptional annual investment return of 8%, a retiree who starts taking Social Security benefits at age 62 will have run out of the money he invested his benefits in at age 92. In other words, if he lives to age 92, he would have more money if he had waited to start taking Social Security benefits at age 70 instead of age 62. If he had a more realistic investment return of 5% per year, then he would run out of those invested benefits at age 84. Since that person would have an actuarial life expectancy of 91 years (men) or 94 years (women), he/she would lose money by taking Social Security at age 62 instead of age 70. We see similar results for the person who starts taking Social Security benefits at age 66 years 8 months rather than at age 70 years.

If you invest Social Security benefits every year between ages 62 and 70 and then you start using that invested money at age 70 in order to equal the amount of the Social Security benefit that you would have received if you waited, then you are looking at a relatively short investment horizon. Because of this, it would be far more prudent to invest that money in a low-risk investment such as bonds, certificates of deposit, or a money market fund. For this short of an investment horizon, it would be far too risky to invest the money in stocks. For this reason, an investment return of 5% per year is probably realistic. If the investment return is less than the average annual inflation rate of 2.5%, then your money is actually losing buying power every year.

Other factors to consider

• Your health. The above calculations are based on average life expectancy. We all think that we are going to live to be 100-years-old but the reality is that most of us die long before that. If you die before the average life expectancy, then it may be better to start taking Social Security benefits at an earlier age than 70. Variables that will likely shorten your life expectancy include chronic health conditions, smoking, obesity, depression, vaccine avoidance, seat belt avoidance, etc.
• The Social Security Trust Fund might run out. The money that you paid into Social Security in payroll taxes during your working years is not really your money. Those payroll taxes you paid were used to pay Social Security benefits for those Americans who were already retired. When we retire, our Social Security benefits come from the payroll taxes of Americans who are still working. For that reason, the optimal ratio of working adults to Social Security recipients is 4:1. That is, four working Americans for every one retired American. Back in 1965, that ratio was 4:1 but the U.S. birth rate has been falling and immigration of new working adults into the U.S. has not kept up and so the current ratio is 2.7:1. This ratio is too low to sustain Social Security and for this reason, the Social Security Trust Fund is projected to become depleted in 2035. After that year, everyone’s Social Security benefit will be reduced by 17%. If this happens, then you would be better off taking Social Security benefits early at age 62 or age 66 years 8 months based on the maxim “Its better to take while the taking is good“. It will be up to Congress to either increase payroll taxes or Federal income taxes to avoid depletion of the trust fund.
• Congress. The real wild card is Congress – they could pass laws that change the ages that you can take Social Security benefits. Or they could eliminate the annual cost-of-living increase in the amount of retirees’ benefits. or they could lower everyone’s benefit. Or they could even privatize Social Security. Any of these changes in the law could affect whether or not it is advantageous to wait to start taking Social Security benefits at age 70.
• Immigration. As noted earlier, the U.S. birth rate has fallen significantly over the past 50 years and this has resulted in a critical reduction in the ratio of current workers to retirees. Even if there was a concerted effort by Americans to have more babies today, that would not result in an increase in the ratio of workers:retirees until 20-30 years from now (when all of those babies grow up and start paying payroll taxes). Unless we have another pandemic like COVID that preferentially kills off older, retired Americans, then the only realistic way of increasing the ratio of workers:retirees is to increase immigration. Specifically, increase immigration of adults who pay into Social Security via payroll taxes. Undocumented immigrants don’t help – they do not pay payroll taxes. A concerted effort to increase the number of legal immigrants would increase the ratio of workers:retirees and push back the date that the Social Security Trust Fund runs out of money. The bottom line is that the U.S. desperately needs more legal immigrants in order to keep Social Security solvent. However, in the current political climate, it is unlikely that the U.S. will seek to increase immigration into our country anytime in the near future.
• Your risk tolerance. The decision about when to start taking Social Security benefits is in many ways a gamble – by waiting to take benefits at age 70, you are taking the risk that you are going to live to be older than 84 and that Congress will eventually restore the Social Security Trust Fund. If your risk tolerance is low, then you may want to take the lower Social Security benefit at an earlier age, such as age 62 – you will be assured of having a known benefit income (albeit lower) and you won’t have to worry about the financial risk of either dying young or having the Social Security Trust Fund run out just as you would have started to take benefits at an older age. To invoke another maxim: “A bird in the hand is worth two in the bush“.
• You need money now. If you have not saved for retirement and you want to stop working at age 62, then you may have no choice but to start taking Social Security benefits at age 62. In this situation, deferring the start of Social Security until age 70 in order to get a bigger payday could mean selling your plasma and living off of cat food for the next 8 years.

So, what am I going to do?

As I rapidly approach the “normal” Social Security retirement age of 66 years 8 months, I’ve decided to hold off taking Social Security benefits until I am 70-years-old. I don’t have any chronic medical conditions, I have a normal BMI, I always wear a seatbelt, I am a lifetime non-smoker, I’ve been vaccinated against every conceivable infection, and I don’t engage in any high-risk activities. So, there is a good chance that I will live to be older than 93. By that age, I will have received far more money from Social Security by waiting to start benefits at age 70 than by taking benefits now and then investing those benefits.

February 27, 2025

If you have a 401(k), 403(b), 457, or Federal Thrift Savings Plan, your annual contribution limits just got a lot more complicated… but in a good way. You should take action in December to be sure that you take full advantage of the IRS rule changes for 2025. These are all deferred compensation retirement plans, meaning that you contributed pre-tax income to them. That income grows until you withdraw money from the plans in retirement at which time you pay regular income tax on the withdrawals. While the money grows in the plans, you do not have to pay annual interest, dividend, or capital gains taxes.

• The contribution limits for 401(k), 403(b), 457, and Thrift Savings Plans will increase in 2025 to $23,500
• People over age 50 can make an additional $7,500 in catch-up contributions
• People born in 1962, 1963, 1964, or 1965 can make a $11,250 catch-up contribution
• There are tax penalties for over-contributing so care should be taken when setting contribution deductions from monthly paychecks

The basics of tax-deferred retirement plans

A 401(k) is a retirement plan for workers employed by for-profit companies. A 403(b) is a very similar plan for workers employed by non-profit companies. A 457 is a similar plan for workers employed by state or local government institutions. The Federal Thrift Savings Plan (TSP) is for workers employed by the Federal government. Because 80% of U.S. physicians are now employed by hospitals or corporations, most doctors are eligible to contribute to one of these types of retirement plans. Physicians employed by public universities are often eligible to contribute to both a 403(b) and a 457 plan.

For employed physicians, these contributions are generally deducted from their regular monthly income. As a result, annual contributions reduce one’s taxable income for that year, thus reducing their marginal income tax rate and lowering their overall tax burden. This is a particular advantage for older individuals who are usually in their peak earning years and paying the highest marginal income tax rates of their careers. Once retired, most people’s annual taxable income falls, resulting in a lower marginal income tax rate. When withdrawing from a 401(k), 403(b), 457, or TSP in retirement, most people will pay less in income taxes on the withdrawal than they would have in their working years.

Each year, the IRS sets a limit on the amount of income that a person can contribute to a 401(k), 403(b), 457, or TSP. For example, in 2024, that limit was $23,000 per year. There is an additional “catch-up” amount that people over age 50 can contribute – in 2024, that catch-up amount was $7,500, meaning that those over age 50 could contribute a total of $30,500 ($23,000 + $7,500).

New limits in 2025

In 2025, the contribution limit for the 401(k), 403(b), 457, and TSP will increase by $500 to $23,500 and the catch-up amount for people over age 50 will remain at $7,500. But here is where things get complicated. If a person will be ages 60-63 in 2025, the catch-up limit is $11,250 instead of $7,500. For those who will be 64 or older, the catchup limit reverts to $7,500. The IRS determines eligibility age by birth year, so you cannot contribute the higher amount in the year that you turn 64. The table below shows the amount a person can contribute based on the year that the person was born.

Birth Year	Base Contribution Limit	Catch-up Limit	Total Contribution Limit
1976 or later	$23,500	$0	$23,500
1966-1975	$23,500	$7,500	$31,000
1962-1965	$23,500	$11,250	$34,750
1961 or earlier	$23,500	$7,500	$31,000

The reason that the IRS has increased the catch-up contribution limits for people age 60-63 is that Americans are behind in retirement savings and the Federal government is trying to encourage people to save more, particularly those close to retirement age. A survey the Federal Reserve found that the average family between ages 55 – 64 was only $537,560. Another survey by the Federal Reserve found that among Americans of all ages, 46% do not have a dedicated retirement account. A survey by AARP found that 20% of Americans over age 50 had no retirement savings and half of those over 50 were worried that they will not have enough savings to last them through retirement. Most of us can no longer rely on pensions and Social Security to finance our retirements, so regular contributions to a tax-deferred retirement plan is essential.

Most people spread their tax-deferred retirement plan contributions out over the course of the year. So, for example, if you get paid monthly, you would contribute a set amount from each month’s paycheck. Each employer will have different rules about how often you can change your contribution amounts and the process involved in making those changes. It is ideal to contact your employer in December each year so that you can start contributing at the higher amount right away in the new year, starting with your January paycheck. The maximum amount to request taken out each month in 2025 is:

• $1,958 monthly for an annual contribution limit of $23,500
• $2,583 monthly for an annual contribution limit of $31,000
• $2,895 monthly for an annual contribution limit of $34,750

Financial advisors typically recommend saving about 15% of one’s annual income toward retirement. At 15%, a person would need to have an annual total income of over $156,000 to reach the maximum contribution limit. For this reason, most Americans will not contribute the maximum amount to their 401(k), 403(b), 457, or TSP because their income is not high enough. But high-income Americans (such as physicians) can afford to contribute the maximum to their tax-deferred retirement plans. Physicians employed by many state-supported public universities can double these contribution limits by maximizing contributions to both a 403(b) and 457.

But beware…

If you overshoot your contributions to a 401(k), 403(b), 457, or TSP, there are severe tax penalties imposed by the IRS. You must withdraw any amount over the contribution limit and pay a 10% early withdrawal penalty on that amount. You will also need to get a revised W-2 form and re-file your taxes for that year. In other words, you’ll incur both a huge financial cost and a huge paperwork cost by over contributing.

The risk of over contributing is highest for those people who have two employers and tax-deferred retirement plans with both. For example if you are younger than age 50 and contribute to 403(b) plans by two different employers, the total amount that you can contribute is $23,500. Because those two employers do not usually communicate your personal information with each other, one will not usually know that you are also contributing to another. So, it is up to you to track the amounts that you contribute to different retirement accounts to be sure that you do not over-contribute.

For people born in 1962, 1963, 1964, or 1965 who take advantage of the higher catch-up contribution of $11,250, there is also a risk of over-contribution penalties in future years if they do not reduce their annual contributions when they get older. For example, a person born in 1962 will be able to contribute a total of $34,750 to their tax-deferred retirement plan in 2025, but can only contribute $31,000 in 2026. That person would therefore need to reduce the amount taken out of their monthly paycheck for their 401(k), 403(b), 457k, or TSP beginning in January 2026 to avoid incurring an over-contribution penalty in 2026.

In 2026, things get even weirder

Beginning in 2026, high income-earners age over age 50 will still be able to make higher catch-up contributions to their tax-deferred retirement plan but those contributions will have to be made to a Roth account. The income level necessary to qualify as a high income-earner in 2026 has not yet been set by the IRS but in 2023, that level was an income greater than $145,000, Because the IRS sets this limit based on inflation, it will likely be higher than $145,000 in 2026. Therefore, in 2026, if you have a 403(b) and were born in 1976 or earlier, your catch-up contributions would need to go to a Roth 403(b).

Unlike a regular tax-deferred retirement plan where you pay income tax the year you withdraw money from the plan in retirement, with a Roth plan, you pay income tax the year that you contribute to the plan and then pay no income tax on the withdrawals in retirement. Ideally, you should contribute to Roth accounts in years that your income tax rate is lower than it will be when you retire. For most people, this means contributing to a Roth 401(k) or Roth 403(b) early in their careers, when their annual income is relatively low. Conversely, when people are late in their careers (i.e., over age 50) and have a high annual income, it is usually unfavorable to contribute to a Roth 401(k) or Roth 403(b).

Because of these new Roth requirements, in 2026 the tax advantages of catch-up contributions for high income-earners will not be as great as they are in 2025. But, you will still be financially better off in the long run by putting those catch-up contributions in a Roth account than you would be by putting that money in a regular after-tax investment since you will have to pay annual taxes on the interest and dividends as well as capital gains taxes when you sell the investment. In a Roth account, you do not have to pay interest, dividend, or capital gains taxes.

What about IRAs?

The new catch-up amounts only apply to 401(k), 403(b), 457, and TSP plans. They DO NOT apply to IRAs. In 2025, the contribution limit for IRAs is unchanged at $7,000 per year with an additional catch-up amount of $1,000 for those people over age 50.

High income earners cannot contribute directly to a Roth IRA. The IRS definition of a high income earner is complex and depends on filing status. Above the income limit there is a “phase-out” income range allowing for a reduced contribution to a Roth IRA. Above the phase-out limit, you cannot directly contribute to a Roth IRA. For example, for a married couple filing jointly, the income limit is $236,000 with a phase-out income range between $236,000 – $246,000. Most physicians in clinical practice have a high enough income that they are unable to directly contribute to a Roth IRA. However, they can do a “backdoor Roth” by first contributing post-tax income into a traditional IRA and then immediately converting that traditional IRA into a Roth IRA. This allows a person to contribute $7,000 each year to a backdoor Roth with those over age 50 able to do an additional $1,000 catch-up contribution. The backdoor Roth is a great way to save for retirement after maximizing contributions to your 401(k), 403(b), 457, or TSP.

For high income earners whose employer permits after-tax contributions to their 401(k) or 403(b) plan, there is also the option of doing a “mega backdoor Roth” conversion. In this case, the IRS permits you to put an additional $46,000 of after-tax income (above your regular pre-tax contribution amount) into your 401(k) or 403(b) and then convert that $46,000 into a Roth 401(k) or Roth 403(b). Not all 401(k) and 403(b) plans allow these additional after-tax contributions so check with your employer to see if the mega backdoor Roth is an option.

Start early and contribute regularly

Over the past 35 years, I’ve seen physicians make just about every retirement savings mistake possible. The result is having to work long past their desired retirement age or not being able to do the things they planned on doing in retirement. Having a lot of money in retirement does not guarantee a happy retirement but not having enough money can make for an unhappy retirement. There are a few steps to ensuring adequate post-retirement income. Start saving early to take advantage of the magic of compounding interest. Save regularly, ideally by contributing to your retirement savings plan by monthly deductions from your paycheck. Maximize your annual contributions to your 401(k), 403(b), 457, or TSP. If you can afford it after maximizing those contributions, do a backdoor Roth IRA every year. If your employer offers both a 403(b) and a 457 plan, contribute to both. These steps will not ensure a happy retirement but they will stack the odds in your favor.

November 25, 2024

A physician colleague recently gleefully announced that he was going to retire to Florida “Because they don’t have a state income tax“. On the surface, this sounds like a great retirement plan – less income tax means more money in your pocket, right? But below the surface lurk many other taxes and in the end, you can end up paying just as much to the state government in these other taxes than you would have paid in income tax. So should a physician (or anyone else for that matter) base moving on whether or not a state has an income tax?

State income taxes

Each state in the U.S. is allowed to devise its own tax system. The type of tax that most people focus on is income tax, mainly because it is a large number that at the end of the year is glaringly prominent when filling out state tax returns. Some states have no income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, and Texas). Some states only tax certain kinds of income (New Hampshire only taxes interest and dividends; Washington only taxes capital gains). Others have a flat income tax, that is a single income tax rate that applies to everyone. And others have a graduated income tax rate that increases with higher incomes. The income tax systems for the states are grouped in the map below.

But here is the thing… if a state has no income tax, it does not mean that all of the state government employees are working without pay,. It means that the state taxes stuff other than income. So, in the long run, you could actually end up paying more in total taxes by moving to a state with no income tax.

Income tax structure affects different groups of people differently.

• Flat income tax – everyone pays the same tax rate with low income and high income earners treated equally
• Graduated income tax – high income earners carry a disproportionate share of the tax burden
• Interest, dividend, and capital gains tax – investors (rather than wage-earners) carry a disproportionate share of the tax burden
• No income tax – government revenue comes from taxes on various goods and services as well as various fees and licenses

Other types of state taxes

In addition to revenue from income tax, states derive income from a myriad of other types of taxes, licenses, and fees. Some of the more common non-income taxes charged by states include:

• Sales tax. All but five states charge sales tax. States with no sales tax include Alaska, Delaware, Montana, New Hampshire, and Oregon. Some states tax all consumer goods and others do not tax items such as food. States with no income tax tend to have high sales taxes such as Tennessee (9.55%) and Washington (9.40%).
• Insurance tax. Each state is free to charge taxes on insurance premiums for any kind of insurance and they do just that. States generally have different tax rates for life insurance premiums, annuities, property insurance, fire insurance, health insurance, etc. These taxes are generally paid by the insurer so the consumer is not usually aware of them, even though the taxes are passed onto the consumer in the way of higher premiums. These tax rates can vary widely and states with no income tax often have the highest insurance premium tax rates. In areas of the country where property insurance is high because of the risk of wildfires, floods, or hurricanes, the tax on property insurance premiums can become a substantial part of the state’s budget.
• Property tax. Taxpayers in all 50 states pay taxes on property that range from a high of 1.64% (New Jersey) to a low of 0.31% (Hawaii). The tax rate only tells part of the story, however. The total property tax paid also depends on the property value. Thus, an average property tax rate in a state where property is expensive will result in a high total property tax paid by the property owner. As a result, the average property owner in Connecticut pays $8,022 per year in property taxes whereas the average property owner in West Virginia only pays $989 per year.
• Gasoline tax. The federal government and all 50 states charge a tax on gasoline. The federal gas tax is 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel. State gas taxes range from a high of 60 cents per gallon (California) to a low of 9 cents per gallon (Alaska).
• Alcohol tax. All 50 states tax beer ranging from a high of $1.29 per gallon in Tennessee to a low of 20 cents per gallon in Wyoming. Three states do not tax wine and 17 do not tax liquor but these states still get revenue from wine and liquor sales by selling them through government-run liquor stores.
• Tobacco tax. All states charge tax on cigarettes ranging from a high of $5.35 per pack (New York) to a low of $0.37 per pack (Georgia).
• Other excise taxes. Gasoline, alcohol, and tobacco taxes are considered excise taxes. States also set different excise tax rates on soda, gambling, tires, marijuana, franchises, motor vehicles, etc. Excise taxes are often not immediately visible to consumers since these taxes are considered a part of the overhead cost of different goods or services.
• Unemployment tax. All states charge employers unemployment tax ranging from 3.95% (Illinois) to 0.45% (South Carolina).
• Gift, inheritance, and estate taxes. 17 states plus the District of Columbia charge tax on the monetary value of gifts, items inherited, or estates over a specified exemption amount. These are highly variable in both the tax rate and the exemption amount.
• Occupational tax. All states require licensing fees for certain occupations such as physicians, barbers, attorneys, plumbers, etc. These get passed to the consumer in the way of higher fees from these professions.
• Licenses and fees. Some of the more common include vehicle registration fees, government utility fees, marriage licenses, building permit fees, dog licenses, restaurant liquor license, etc. But because they are called licenses and fees, most people do not realize that they are simply taxes by another name. In many states, the total state revenue from licenses and fees is rising much faster than revenue from income tax.
• Hotel tax. Often called lodging tax or occupancy tax, this type of tax can be charged by either state governments or local governments (or both). For this reason, hotel tax rates will vary from city to city from a high of 22.7% in Columbus, Georgia to a low of 7.0% in Gillette, Wyoming.
• Corporate income tax. 44 states levy corporate income tax ranging from a high of 9.8% (Minnesota) to a low of 2.5% (North Carolina). These taxes get passed on to consumers in the form of higher prices for goods and services and so most consumers are not even aware that they are indirectly paying these taxes.
• Gross receipts taxes. These are taxes paid by corporations on their gross sales and differ slightly from corporate income tax. States that charge this type of tax include Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington. Gross receipts taxes can significantly increase the cost of goods in these states. For example, when a consumer buys a beer at a restaurant in Texas, the farmer growing the barley, the brewery making the beer, the distributor, and the restaurant all have to pay gross receipt taxes at each step. The consumer ultimately pays the sum of all of these gross receipt taxes in the form of a higher cost for goods.

You can’t escape taxes by moving to another state

So, if you are thinking about moving to Florida or Texas to avoid having to pay state income taxes, forget it. Every state is going to tax you somehow. States with low or no income taxes just increase other kinds of taxes. Some of these you notice when you write a check for them, such as property taxes. Some taxes we have gotten so use to paying a little at a time, that we no longer notice them, such as sales tax and excise taxes. Other taxes are so deeply embedded in the cost of goods or services that only a few Americans even know that they pay for them, such as gross receipt taxes and taxes on insurance premiums. Non-income taxes ultimately result in a higher cost of living in states that do not have a state income tax.

If you are thinking about moving to another state, make the decision based on where your friends and family are, what activities you like to do, and what climate you prefer. If you have an extraordinarily high income, like Elon Musk, then sure, you can save a billion dollars or two in income taxes by moving to Texas. But for the rest of us, make the decision on where you enjoy life the most and forget about state income taxes.

July 26, 2024