Divorce the IRS

The Ideal Number That Helps You Pay Less Tax in Retirement

• James Miller

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Most people think the key to lowering taxes in retirement is simple: use Roth accounts.

But what if the real strategy is more nuanced than that?

In this episode of The Divorce the IRS Podcast, we break down one of the most important concepts in retirement tax planning: finding your “ideal number” in tax-deferred accounts and using a combination strategy to minimize taxes over your lifetime.

While Roth IRAs and Roth 401(k)s are powerful tools, their value goes far beyond tax-free growth. When used correctly, they can help reduce your retirement tax rate, avoid Social Security taxation, limit Medicare premium increases, and even help sidestep issues like the widow’s penalty.

But here’s the key insight: maximizing Roth alone is not the full strategy.

We explain why having some money in pre-tax accounts can actually work in your favor, especially when you understand how to use your standard deduction each year. By coordinating withdrawals between tax-deferred and tax-free accounts, you can potentially generate income in retirement while paying little to no tax.

Using a simple example, we show how the standard deduction allows you to withdraw from pre-tax accounts tax-free, and how going beyond that threshold triggers taxes at the lowest brackets.

This episode introduces the “ideal number”, the amount you should have in tax-deferred accounts by retirement to fully use these rules without exposing yourself to unnecessary taxes from required minimum distributions later on.

If your goal is to build wealth while paying the least amount of tax possible over your lifetime, this is a conversation you cannot afford to miss.


Calculate your ideal number:
https://baobabwealth.com/ideal-number/

Watch the Ideal Number Video:
https://baobabwealth.com/the-ideal-number-for-tax-efficient-retirement-what-most-people-miss/

In This Episode

• Why Roth accounts are powerful but not a complete strategy
 • How combining tax-free and tax-deferred accounts lowers lifetime taxes
 • How the standard deduction creates tax-free retirement income
 • The concept of the “ideal number”
 • Why too much in pre-tax accounts creates future tax risk

What’s Coming Next

• Roth conversion strategies to reduce future taxes
 • How to shift assets toward tax-free income
 • Advanced strategies to minimize taxes in retirement


SPEAKER_00

Welcome to the Divorce the IRS Podcast, the retirement income planning podcast designed specifically for those who want to pay the least amount of taxes possible and build a retirement income that lasts. Inspired by the best-selling book, Divorce the IRS, you get to go behind the scenes with financial planner, author, and speaker Jimmy Miller. Learn how to set yourself up to pay the least amount of taxes in retirement when you'll need your money the most. And now, here's your host, Jimmy Miller.

SPEAKER_01

Welcome. Welcome to episode 18 of the Divorce IRS podcast. Now that we've covered some tax basics in episodes one through nine of this podcast, along with the eight tax time bombs that can explode at various stages of your life in episodes 10 through 17, we're ready to explore some of the concepts at a deeper level and dive into some strategies you can use to help out future you. I'm sure you figured out by now, here at episode 18, that the Roth IRA and Roth 401k are two of the main tools you can use to diffuse every tax time bomb and officially divorce yourself from the IRS one day if you use them correctly. As you now understand, the benefits of Roth accounts are so much greater than just the tax-free growth most people associate with them. If utilized correctly, they can boost the amount you save for retirement and significantly lower your retirement tax rates, possibly all the way down to 0%. They also help you avoid Social Security taxes and Medicare premium hikes. The Roth account even helps you avoid the widow's penalty and paying taxes from the grave. When done well, a person can pay no federal or state taxes in retirement. Achieving this means using Roth accounts correctly and in combination with tax-deferred accounts. You heard that correctly. As big a fan as I am of Roth accounts, having some money in pre-tax accounts can also be beneficial. You want to make sure that you're always able to take advantage of your standard deduction, which is the tax-free income you're allowed each year from the IRS. How much you should have today in your pre-tax accounts is something that I call the ideal number. Now, as awesome as Roth accounts are, the key to building maximum wealth and paying minimal tax, both over your working life and in retirement, is actually a combination strategy that utilizes both tax-deferred and tax-free retirement accounts. With both types of accounts available, you have the ability to proportionately withdraw money from the accounts that are most beneficial to you each tax year. This allows you to maximize your standard deduction using tax-deferred money, as well as your tax-free accounts. This is an important concept to understand and a valuable way to boost your wealth. It allows you to turn the tables on the IRS by using their rules to beat them at their own game. Now to do this correctly, you need to figure out your ideal number. Under our progressive style tax system, the first dollars you earn each year are actually tax free. You receive this income tax-free by utilizing your standard deduction or your itemized deduction. In 2026, this is $16,100 for individuals and double that, or $32,200 for married couples, finally jointly. And if you're older than 65 or blind or both, your standard deduction is even greater. This is the amount of income you can write off and not pay taxes on each year. The amount increases over time as well as its index to inflation. Let's take a look at utilizing standard deductions and consider John. John is retired, single, under 65, and he would like to withdraw $100,000 a year from his retirement accounts. He has no other income. When John files his taxes, he is allowed to apply his standard deduction. He gets to write off the first $16,100, which is the 2026 standard deduction of his income tax free. This leaves John with only $83,900 of withdrawals that could be subject to tax, using the progressive brackets we discussed in episode four. If John is entitled to the first sixteen thousand one hundred dollars of his income tax free, why not take that retirement income from a source he would normally have to pay taxes on? It makes perfect sense to withdraw his first sixteen thousand one hundred dollars from a tax deferred account, like an IRA, and then use his standard deduction to offset the tax owed on this money. This money has never been taxed because it was saved earlier in life in a pre-tax account. And now done correctly, he can withdraw and spend this money all without ever paying any taxes on it. If John withdraws more than the standard deduction from his tax-deferred account, say $17,000 from his IRA, he would now owe taxes at the lowest tax bracket of 10%, but only on the $900 that exceeded his standard deduction. This means you can receive a tax deduction when you contribute money to an IRA or traditional 401k and not pay taxes when you withdraw. This tax deduction isn't a loan. It's a true wealth building opportunity for you to legally cheat the IRS out of a little tax money. Now, although I've highlighted Roth accounts extensively throughout this podcast, I am also saying that most people also need some money in tax-deferred accounts. You just don't need that much and probably less than you already have in these types of accounts. So what is the ideal number and how do you figure that out? Now, most people I sit down with to discuss taxes and financial planning already have significant sums in tax-deferred accounts, more than needed to maximize this bucket for lifetime tax planning. For most people, it's time to stop contributing to the tax me later bucket or taking IRS loans, as I like to say, and start building the tax me never bucket as much as possible. How much you need in tax deferred accounts when you reach retirement depends on many factors and should be calculated within your unique financial plan. It will depend on the future amount of Social Security benefit and when you choose to claim it, as well as other factors like the amount of money you have invested in taxable accounts and whether you'll receive a pension or have rental income in retirement. But as a general rule, by the time you are 73 and subject to RMDs, required minimum distributions, your balances in tax-deferred accounts should be low enough that your RMD is equal to or less than your standard deduction. To determine if your balances in tax-deferred accounts are already too big, you have to calculate how long you have until retirement, how much you're contributing, and the expected growth on these assets. I've built a free calculator that you can use to find your ideal number at divorce-the dash irs.com. If you have more than your ideal number in this bucket, consider using the shifting and conversion strategies we'll be discussing in upcoming episodes. If you want to dive deeper into the concept of the ideal number, I've also created a video about it, which I'll link in the description for you. This discussion shows the enormous benefits of Roth accounts when utilized correctly. However, this means using them in combination with tax-deferred accounts, utilizing standard deductions, and calculating your ideal number. We do this so that when you're 73, your balances and tax deferred accounts are low enough to avoid unnecessary taxes forced upon you by RMDs. It's a great strategy. And as we'll discuss in the upcoming episodes, there may be even more of the raw strategies available to you.

SPEAKER_00

Want even more ideas, tools, and resources on how to navigate your financial life? Check out all the resources on the Divorce the IRS website at divorce-the-IRS.com or the Bayob Wealth website at BayobubWealth.com and subscribe to the blog to stay up to date on issues affecting retirement income planning. Don't forget to subscribe to the podcast so you never miss an episode. Bayob Wealth and Bayabub Wealth Abroad are DBAs of Bayob Wealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.