When most people think about saving for retirement, traditional tax-deferred accounts like 401(k)s and IRAs are often top of mind. And for good reason—they offer the potential for long-term growth and allow you to defer taxes on your contributions and earnings.
But there’s a catch: those taxes aren’t gone, they’re just delayed.
Once you start taking distributions in retirement, you’ll be taxed on the money you withdraw. And depending on your income level and tax bracket in retirement, those withdrawals could cost you more than you expect.
“There’s not a dollar that Uncle Sam doesn’t tax, so we’d argue that failing to consider taxes in wealth management isn’t truly holistic.”
— Todd Mackay, Avantax
The Hidden Cost of Tax-Deferred Accounts
Tax-deferred accounts like traditional IRAs and 401(k)s can be powerful tools, but they come with a built-in tax liability. Every dollar you take out in retirement is subject to income tax—just when you're relying on those funds to support your lifestyle.
That’s why smart retirees and forward-thinking planners are looking beyond just tax deferral.
A More Tax-Savvy Strategy: Roth IRAs and Roth Conversions
Roth IRAs work differently. While contributions are made with after-tax dollars, qualified withdrawals in retirement are completely tax-free. This can be a game-changer, especially if you expect your tax rate to stay the same—or increase—in the future.
Roth conversions allow you to move funds from a traditional IRA or 401(k) into a Roth IRA, paying taxes on the conversion now so you can enjoy tax-free growth and withdrawals later.
Why It Matters
A tax-smart retirement strategy goes beyond just growing your savings—it’s about keeping more of what you’ve earned. Incorporating Roth IRAs and Roth conversions into your plan can provide flexibility, reduce your future tax burden, and even improve your legacy planning options.