Exhibit A. You could not have made my point more perfectly.


An example to demonstrate:

A pilot has $400k of income at delta. For simplicity sake, let’s say the pilot doesn’t contribute a penny of their own money and only focus on the spill cash.

Said pilot receives $70k of income beyond the 401a17 income limit of $330k, thus generating $11,200 of spill cash for a total income of $411,200 that year. Assuming this pilot is married and filing jointly, they would owe 32% on the $11,200 of spill just for federal income taxes, plus any applicable state income tax, and 1.85% ALPA dues.

So let’s assume they live in a tax-free state. In such case they would have paid 33.85% tax on every dollar of spill they earned that year.

Now, in retirement let’s say the pilot has amassed enough retirement dollars to support a $400k per year withdrawal (not likely unless the pilot has other passive or active income sources, in which case all bets are off as he/she is no longer working within the assumption that their livelihood is dependent on the career we all signed up for- which is the vast majority of our pilots).

In retirement, that pilot would pay 10% of the first $22,000, 12% of the next $67,450, 22% of the next $101,300, 24% of the next $173,450, and finally 32% of the last $35,800. Add all that together, and the pilot will have paid $85,664 of federal income taxes on $400k of retirement plan withdrawals, or an EFFECTIVE tax rate of 21.4%. This pilot is still “in the 32% tax bracket”, but the treatment of dollars on the way OUT is vastly different than the treatment of the dollars on the way IN.

21.4% is the tax rate that compares apples to apples against the marginal rate applicable to spill cash, or in this example 33.85%. It’s this arbitrage that makes a tax-deferred account powerful. Less income in retirement makes the arbitrage even better.

Now, as an aside, I think assuming an average pilot will have the ability to withdraw an equivalent income as they were making in active service from their retirement account is kind of a stretch. A more realistic example based on a legacy pension level of retirement income (60%, or $240k in this example) yields an effective rate of $18.5%. And many states also have a progressive tax rate, which also would compound the arbitrage to the pilots favor.

Disclaimer for people with other income streams, of which there are about a million considerations as to if it makes sense. My example demonstrates an average pilot who wants to fly airplanes, and not manage outside ventures.

YMMV, DYODD