The tax bill hiding inside retirement savings is bigger than many Americans realize. Millions who built large 401(k) and IRA balances may face higher taxes in retirement than expected. Financial experts say Roth accounts are increasingly becoming a key strategy to soften that blow.
Retirement accounts have long been built around a simple promise: contribute today, defer taxes, and withdraw the money later when income is lower. For decades, traditional 401(k) plans and individual retirement accounts have been the backbone of that strategy, allowing workers to postpone taxes while their investments grow.
But that deferred tax bill does not disappear. According to retirement income specialist Wade Pfau, the tax question is not whether it will be paid but when and at what rate. As many Americans approach retirement with large balances in tax-deferred accounts, financial planners say the structure of these savings can create unexpected tax consequences.
Large Retirement Balances Can Trigger Higher Taxes Later
Traditional retirement accounts offer an immediate benefit during working years: contributions reduce taxable income and investments compound without annual tax liability. Yet withdrawals in retirement are taxed as ordinary income, which can push retirees into higher tax brackets than they anticipated.
According to the Investment Company Institute, investors held about $14 trillion in traditional IRAs in 2024, compared with roughly $2 trillion in Roth IRAs. The imbalance means many households depend heavily on accounts that will eventually generate taxable income.
For retirees with significant savings, the issue becomes particularly visible once required minimum distributions begin. Federal law requires most holders of traditional retirement accounts to start withdrawing money at age 73. Those withdrawals, known as R.M.D.s, can force retirees to take larger distributions than they actually need.
According to tax expert Ed Slott, this dynamic can unexpectedly increase a retiree’s taxable income. Larger withdrawals may push households into higher marginal tax brackets, increase the share of Social Security benefits subject to tax, and trigger surcharges on Medicare premiums.
Medicare’s income-related monthly adjustment amounts are based on modified adjusted gross income. In 2026, the standard monthly premium for Medicare Part B is $202.90, but higher-income retirees can pay significantly more once their income crosses certain thresholds. The result, some planners argue, is that retirees who assumed their tax rates would fall after leaving the workforce may discover the opposite.
Roth Accounts Offer a Different Tax Structure
Roth retirement accounts operate under a different tax model. Contributions are made with money that has already been taxed, but qualified withdrawals in retirement are generally tax-free.
Because withdrawals from Roth accounts do not typically count toward adjusted gross income, they can help retirees manage their tax exposure. According to financial educator Nancy Gates of the planning platform Boldin, this flexibility becomes particularly useful in the early years of retirement, before Social Security benefits are claimed and before required minimum distributions begin.
Those years are sometimes described by planners as a “tax valley,” a period when retirees may temporarily fall into lower tax brackets. During that window, some investors convert portions of their traditional retirement savings into Roth accounts. The converted amount is taxed in the year of the conversion, but future growth and withdrawals can then occur tax-free.
Recent legislative changes have also expanded the role of Roth savings within workplace plans. According to data from the Plan Sponsor Council of America, more than 95 percent of employer-sponsored retirement plans now offer a Roth option. Participation has been gradually increasing as savers seek greater tax flexibility.
Roth accounts can also play a role in estate planning. Under current law, heirs must withdraw funds from inherited retirement accounts within ten years. When those assets come from a traditional IRA, withdrawals are taxable. With inherited Roth IRAs, the withdrawals are typically tax-free, allowing the assets to continue growing during that decade.
Financial planners often emphasize that the goal is not eliminating taxes entirely but managing when they are paid. As Pfau notes, retirement planning increasingly involves identifying opportunities to pay taxes at the lowest possible rates over a lifetime.
