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For years, the message has been simple: Max out your 401(k), take the tax deduction, and let it grow.<\/p>\n
To be fair, that advice has helped a lot of people build meaningful retirement savings.<\/p>\n
<\/p>\n But for many higher-income, consistent savers \u2014 especially those now sitting on large IRA<\/a> or 401(k)<\/a> balances \u2014 that same strategy is starting to show a different side, not during the working years, but later, when they use money \u2026 or they’re forced to withdraw it.<\/p>\n From just $107.88 $24.99 for Kiplinger Personal Finance<\/p>\n Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues<\/p>\n <\/p>\n \nCLICK FOR FREE ISSUE\n<\/p>\n <\/a><\/p>\n Sign up for Kiplinger\u2019s Free Newsletters<\/p>\n Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.<\/p>\n Profit and prosper with the best of expert advice – straight to your e-mail.<\/p>\n What looked like smart tax planning<\/a> along the way can quietly turn into a tax problem on the back end.<\/p>\n When big balances become a different kind of asset <\/p>\n By the time many people reach their 60s or early 70s, their largest pool of money isn’t in a brokerage account or even real estate \u2014 it’s in pretax retirement accounts.<\/p>\n On paper, that feels like a win.<\/p>\n <\/p>\n But unlike a taxable account, where gains might be taxed at favorable capital gains rates, every dollar in a traditional IRA or 401(k) is eventually taxed as ordinary income. There’s no step-up in basis<\/a>, no preferential treatment.<\/p>\n While the balance might read $1 million, $2 million or $5 million, that’s not really the amount you “own” in the same way you would in a taxable account. A portion of it \u2014 sometimes a significant portion \u2014 belongs to the IRS.<\/p>\n If you don’t need the money<\/a> for spending, the situation can get more complicated, not less.<\/p>\n The RMD issue \u2014 even if you don’t need the income<\/p>\n One of the biggest surprises for many retirees is how required minimum distributions (RMDs<\/a>) actually play out.<\/p>\n Starting in your early 70s, the government requires you to begin pulling money out of those accounts. It doesn’t matter whether you need the income or not.<\/p>\n For someone with a modest balance, this might not be a big deal.<\/p>\n But for someone with a large IRA \u2014 those required withdrawals can be substantial \u2014 and every dollar is taxable.<\/p>\n We’ve seen situations in which retirees are forced to take income they don’t need, only to find themselves:<\/p>\n It’s an odd outcome: After years of careful saving, they’re now managing around a tax problem they didn’t expect.<\/p>\n The part most people miss: What happens to the kids<\/p>\n For a long time, there was at least a partial workaround. If you didn’t use all your IRA, your children could inherit it and stretch the distributions over their lifetimes.<\/p>\n That changed with the SECURE Act<\/a>.<\/p>\n Today, in most cases, non-spouse beneficiaries have to empty an inherited IRA<\/a> within 10 years.<\/p>\n That sounds simple enough, but the tax impact can be significant \u2014 especially depending on when those withdrawals happen.<\/p>\n Picture a scenario in which a couple leaves a $2 million IRA to two adult children. Each inherits $1 million. Those children are likely in their peak earning years, already in relatively high tax brackets.<\/p>\n Now they must layer in distributions from that inherited IRA over a 10-year window. However they time it, those withdrawals are taxed as ordinary income.<\/p>\n Not capital gains, not at a reduced rate \u2014 it’s just straight income, on top of everything else they’re earning.<\/p>\n In many cases, a meaningful portion of that inheritance goes to taxes in a relatively short period of time.<\/p>\n The irony: You might not even need the account<\/p>\n What makes this more frustrating is that the issue tends to show up most clearly for people who saved well<\/a> and lived within their means.<\/p>\n A lot of higher-net-worth retirees<\/a> don’t rely heavily on their IRAs for their lifestyles. They might have other assets, or don’t spend at a level that requires tapping those accounts aggressively.<\/p>\n But the structure of pretax accounts doesn’t really allow you to ignore them. Between RMDs during your lifetime and the 10-year rule after death, those dollars are going to be taxed one way or another.<\/p>\n What many people thought of as a long-term asset often behaves more like a delayed tax liability.<\/p>\n A better way to think about it<\/p>\n This isn’t about saying 401(k)s were a mistake. They’ve been incredibly effective accumulation tools.<\/p>\n The issue is concentration.<\/p>\n Just as you wouldn’t want all your investments in one stock, having the majority of your wealth tied up in one tax category can create limitations later on.<\/p>\n More planning today is focused on building a mix across different “tax buckets”:<\/p>\n Pretax (traditional IRAs and 401(k)s)After-tax \/ tax-free (Roth accounts<\/a>)Taxable accounts<\/p>\n That mix gives you options. In retirement, options matter.<\/p>\n Being able to choose where income comes from \u2014 rather than being forced into one source \u2014 can make a noticeable difference in how much you pay over time.<\/p>\n The window to fix it<\/p>\n The good news is this is something that can be managed, particularly in the years leading up to RMDs.<\/p>\n That might involve gradually shifting some assets into Roth accounts<\/a>, being more intentional about withdrawals earlier in retirement, simply coordinating income more carefully year to year or insuring the tax liability to an extent.<\/p>\n <\/p>\n “Max out your 401(k)” is still good advice. It’s just not complete advice \u2014 at least not for everyone.<\/p>\n For those with larger balances, especially those who might not need the funds, the conversation needs to shift from just saving to how those savings will eventually be taxed.<\/p>\n At the end of the day, it’s not just about how much you’ve built.<\/p>\n It’s about how much of it stays in your family or flows in accordance with your wishes.<\/p>\n Related Content<\/p>\n This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC<\/a> or with FINRA<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"(Image credit: Getty Images) For years, the message has been simple: Max out your 401(k), take the tax…\n","protected":false},"author":2,"featured_media":673951,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[28,147,530],"class_list":["post-673950","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/673950","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=673950"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/673950\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/673951"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=673950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=673950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=673950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}