Strategic Contributions
Model specific annual contribution amounts across tax-advantaged accounts (401k, IRA, HSA) to reduce current-year taxes and project long-term account growth.
How it works
The Strategic Contributions strategy applies advisor-specified contribution amounts to the projection year by year. For each account type, the advisor enters the annual contribution amount. Traditional (pre-tax) contributions reduce taxable income; Roth contributions have no current-year tax effect but create tax-free growth. HSA contributions are deductible above-the-line. The strategy does not automatically calculate an optimal split — that judgment belongs to the advisor based on the client's bracket, retirement expectations, and account balances.
1. Enter Contribution Amounts by Account Type
Specify annual contribution amounts for each account type: Traditional 401(k), Roth 401(k), Traditional IRA, Roth IRA, HSA. The system applies these each year the strategy is active.
Example: $23,000 Traditional 401(k) + $7,000 Traditional IRA + $8,300 HSA (family, 2024) = $38,300 in deductible contributions2. Calculate Deductible Contribution Reduction
Traditional 401(k), Traditional IRA (subject to income phase-out for active participants), and HSA contributions reduce taxable income. Roth contributions do not.
AGI Reduction = Traditional 401(k) + Deductible IRA + HSA Contribution Tax Savings = AGI Reduction × Marginal Tax Rate
Example: $38,300 deductible contributions × 22% marginal rate = $8,426 current-year federal tax reduction3. Project Account Balance Growth
Contributed amounts are added to the respective account balance and grow at the investment return assumption. Traditional accounts grow tax-deferred; Roth and HSA grow tax-free.
FV = Annual Contribution × ((1 + Return)^Years - 1) / Return
Example: $25k/year for 20 years at 7% return = $1,023,000 at retirement
Real-world context
The Power of Maxing Out Early
Starting maximum contributions at age 30 vs. 40 can mean an extra $500k-1M at retirement due to compound growth. The first 10 years of contributions often grow to be worth 40-50% of final account balance. Even if you can't max out every account, maxing whatever you can as early as possible pays enormous dividends.
IRS reference: Publication 590-A - IRA Contribution Limits
HSA as Stealth Retirement Account
HSA is the most tax-advantaged account: deductible contribution, tax-free growth, tax-free medical withdrawals. Strategy: Max HSA, pay medical expenses out-of-pocket, save receipts, let HSA grow. In retirement, withdraw tax-free for decades of accumulated receipts. After 65, can withdraw for non-medical (taxed like Traditional IRA).
Roth vs. Traditional in Practice
The 'should I do Roth?' question has no perfect answer. Unknowns: future tax rates, retirement income, state residency. Safe approach: diversify. If in 22% bracket, do mix of Traditional (immediate 22% savings) and Roth (tax-free growth). Creates tax flexibility in retirement to manage bracket.
Employer Match is Free Money
A 401(k) employer match represents an immediate return on contributions — a 50% match, for example, equals an instant 50% return. Always contribute enough to get full match before funding other accounts. Missing match is leaving compensation on the table. If company matches 6%, contribute at least 6% even if it means reducing other savings.
Traditional IRA Deductibility — Three Paths
Traditional IRA contributions are deductible, partially deductible, or non-deductible depending on whether the contributor (and spouse) is covered by a workplace retirement plan. Three paths: (1) Contributor NOT covered at work, spouse NOT covered — fully deductible regardless of income. (2) Contributor covered at work — deductibility phases out: MFJ $123k–$143k (2024); Single $77k–$87k (2024). (3) Contributor NOT covered but spouse IS — deductibility phases out MFJ $230k–$240k (2024). 2025 limits rise modestly per IRS inflation indexing. Stratum does NOT auto-apply the phase-out — the advisor must enter only the deductible portion on the Traditional IRA line. If the client's contribution includes a non-deductible portion (common in backdoor Roth pipelines), enter that portion separately as non-deductible and track the basis separately. See retirement-contribution-deduction help for the complete deductibility matrix.
IRS reference: IRC §219(g); IRS Publication 590-A — 2024/2025 phase-out ranges
Pre-Tax Contributions Cascade Beyond Tax Savings
Every dollar deducted from AGI via a Traditional 401(k), deductible IRA, or HSA contribution has downstream effects beyond the current-year bracket savings: (1) Lower provisional income reduces the taxable portion of Social Security benefits (from 85% down toward 50% or 0%). (2) Lower MAGI can drop the client under an IRMAA tier, saving Medicare surcharges two years later. (3) Lower NIIT base if the client was over the $250k MFJ threshold. (4) More QBI room below the SSTB phase-out if the client has qualified business income. These cascades mean pre-tax contributions often produce far more lifetime value than the surface-level deduction × marginal rate calculation suggests, especially for high-earning clients near bracket boundaries.
Roth Conversion Coordination
When Strategic Contributions is paired with Roth Conversion auto-mode in the same year, the pre-tax contribution lowers the ordinary income Roth auto-mode sees, freeing bracket headroom for a larger conversion. Net effect: a $23k pre-tax 401(k) contribution plus Roth auto-mode often produces roughly $23k more converted (all else equal) than the same scenario without the contribution. Stratum handles this interaction automatically — Roth auto-mode sees post-contribution income per the Phase A/B/C sizing sequence.
What drives the result
Each dollar contributed reduces AGI dollar-for-dollar. At the 22% bracket, a $23,000 contribution (2024 limit; $23,500 in 2025) saves ~$5,060 in federal tax while building tax-deferred retirement wealth.
$23,000 contribution (2024) on $120k salary: AGI drops to $97k, saving ~$5,060 in federal tax at 22% marginal rate
Higher match increases priority of 401(k) contributions. 100% match on first 6% = free money that should be captured before other contributions.
$100k salary, 100% match on 6% = $6k free money. Must contribute $6k to get it. 50% match = $3k free money.
Traditional IRA contributions reduce current taxable income (subject to income phase-out). Roth contributions have no current-year tax effect but create tax-free growth and withdrawals.
In 22% bracket expecting 12% in retirement: Traditional IRA saves 10 percentage points. In 12% bracket expecting 22% in retirement: Roth IRA saves 10 percentage points.
Higher current bracket makes Traditional contributions more valuable (higher immediate savings). Lower bracket makes Roth more attractive (pay low rate now).
12% bracket: Roth better (pay 12% now). 32% bracket: Traditional better (save 32% now). 22%: Debatable.
Assumptions
- 2024 contribution limits: 401(k) $23,000 (+$7,500 catch-up age 50+), IRA $7,000 (+$1,000 catch-up age 50+), HSA $4,150 individual / $8,300 family (+$1,000 catch-up age 55+)
- 2025 contribution limits: 401(k) $23,500, IRA $7,000, HSA $4,300 individual / $8,550 family
- 2026 contribution limits: 401(k) $24,500 (+$8,000 catch-up age 50+; super catch-up age 60–63 remains $11,250), IRA $7,500 (+$1,100 catch-up age 50+), HSA $4,400 individual / $8,750 family (+$1,000 catch-up age 55+)
- Employer match does not count toward the employee contribution limit
- Traditional IRA deductibility may phase out at high incomes for active plan participants — see Retirement Contribution Deduction help
- Client has sufficient earned income to support the contribution amounts entered
Limitations
- Contribution amounts are entered manually — the strategy does not automatically calculate an optimal allocation or Traditional vs. Roth split
- Does not model 401(k) after-tax contributions or mega backdoor Roth strategies
- Does not include employer profit sharing or matching contributions in the deductible calculation
- SECURE 2.0 'super catch-up' for ages 60–63 (additional 401k catch-up starting 2025) is not separately modeled
- Roth catch-up mandate not modeled (IRC §414(v)(7), effective 2026). For participants in 401(k), 403(b), and governmental 457(b) plans whose prior-year FICA wages from the plan sponsor exceeded $150,000 (indexed annually — $150,000 of 2025 wages for 2026 catch-ups; see IRS Notice 2025-67), catch-up contributions must be made on a Roth basis. Stratum does not capture employer-specific prior-year wages and cannot apply this rule automatically. For clients above the threshold, the projection will overstate the federal income tax deduction from catch-up contributions by the catch-up amount multiplied by the marginal rate. Workaround: set the Traditional 401(k) catch-up amount to zero for affected clients and enter the equivalent amount as a Roth 401(k) contribution. This rule does not apply to IRA catch-ups, SIMPLE/SEP plans, or self-employed individuals (no FICA wages).
- Does not model mid-year changes to contribution amounts within a single tax year
Watch this explained
Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.