Why Traditional (Pre-Tax) Retirement Savings Could Be a Financial Disaster for 1099 CRNAs

What if what worked for your parents’ retirement could be a financial disaster for yours? For many CRNAs, traditional pre-tax retirement savings could be a ticking time bomb. With the Secure Act, historically low tax rates, and a massive wealth transfer on the horizon, the old rules of retirement planning have changed dramatically. Brett Fellows, CFP®, explains why traditional pre-tax retirement accounts are probably the worst to own and build on today.

The Secure Act Changed Everything

Before 2020, traditional pre-tax accounts were a great tool, allowing you to defer taxes for your lifetime and then for your beneficiary’s lifetime through a “stretch IRA.” But the Secure Act was an earth-shattering event in the financial world. It eliminated the stretch IRA for non-spouse beneficiaries, shortening the tax deferral period to just 10 years after your death. 

This means your heirs will be forced to pay all taxes on your accumulated pre-tax wealth within a decade, likely pushing them into higher tax brackets. This change made traditional accounts the worst possible asset for wealth transfer and estate planning.

Your Deduction Is Not a Real Deduction

Many CRNAs argue that a traditional pre-tax contribution is valuable because of the tax deduction you get. But is it? A real deduction, like for charity or mortgage interest, is something you get to keep. The so-called pre-tax deduction is not the same thing. You get an upfront break, but you eventually have to give it back to the government. It’s really just an IRS loan that you’ll pay back at the worst possible time (in retirement) and at an unknown future tax rate.

Why Now is the Best Time to Pay Taxes

Good tax planning dictates that you take deductions when rates are high and take income when rates are low. With today’s historically low tax rates, this is the perfect time to pay taxes and build tax-free wealth. 

Tax rates can’t remain this low forever. With the national debt and budget pressures facing the government, taxes are likely to increase. The people who will be most affected are those with the most money in traditional pre-tax accounts, as these are the low-hanging fruit for Congress. By building a Roth account, you’re paying taxes while they’re on sale, guaranteeing a 0% tax rate in retirement.

The QBI Deduction Problem for 1099 CRNAs

For 1099 CRNAs, pre-tax contributions can create an additional tax problem. While a pre-tax contribution lowers your taxable income, it also shrinks your Qualified Business Income (QBI) deduction, which is 20% of your eligible business income. For every dollar you contribute to a pre-tax account, you get 20 cents less in QBI deduction. For example, a $20,000 pre-tax contribution might only provide a real reduction benefit of $16,000, with $4,000 “disappearing into the ether.”

A Tax Time Bomb for Beneficiaries

The Secure Act created a tax time bomb that will affect the next generation. There is over $37 trillion sitting in pre-tax retirement accounts from the baby boomer generation, which will be transferred in the near future. While you want your children and grandchildren to inherit tax-free money, they can’t convert an inherited pre-tax account to a Roth. That has to be done by you. Without a Roth conversion, your beneficiaries could be forced to take large taxable distributions during their peak earning years, throwing them into the highest tax brackets.

CRNA Case Study: The Financial Power of Roth Conversions

A case study of a CRNA couple, Reggie and Regina, with a total of $1.25 million in retirement savings, shows the dramatic impact of Roth conversions. By converting $50,000 a year for seven years, they saw a lifetime tax savings of over $385,000. In addition, their portfolio value increased by over $483,000, for a total financial swing of over $868,000. This is because Roth conversions reduce future RMDs and eliminate the tax drag on distributions. The time to act is now, in this low-tax environment.

The Roth Advantage: Your Path to Financial Control

Traditional pre-tax retirement savings made sense before 2020. Today, they are probably the worst assets to own and build on. Tax rates are at historic lows, the Secure Act forces your beneficiaries into higher tax brackets, and if you’re a 1099 CRNA, pre-tax contributions reduce your QBI deduction. Roth accounts give you control and certainty, with no required minimum distributions forcing you into a “government plan.” They are your path to a tax-free retirement on your terms.

Ready to see how Oak Capital Advisors can help? Schedule a meeting.

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