Saving aggressively for retirement is a good thing. But if most of your retirement savings are concentrated in pre-tax accounts, you could be creating a tax problem for the future.
This is what we call pre-tax overload. It happens when too much of your retirement wealth is held in accounts such as traditional 401(k)s, traditional IRAs, 403(b)s, and other pre-tax retirement plans. While these accounts can provide valuable tax deductions during your working years, the tax bill eventually comes due.
The key question is not simply how much you are saving. It is what type of account you are using to save and what your tax rate may look like when you need the money. We’re here to help you make sense of it all.
The Tax Rate Question
For years, many people have been told that they should contribute as much as possible to pre-tax retirement accounts because they are likely to be in a lower tax bracket after they stop working. That can be true. But it is not true for everyone.
Consider a married couple who are both working and currently fall into the 22% federal tax bracket. They assume their tax rate will drop significantly once they retire because their paychecks will disappear. But retirement income does not necessarily mean low income.
Social Security, pensions, dividends, interest, IRA withdrawals, and other sources of income can add up quickly. And eventually, required minimum distributions can become another significant source of taxable income.
For 2026, the 22% federal tax bracket for married couples filing jointly applies to taxable income between $100,800 and $211,400, according to the IRS 2026 federal income tax brackets. A retiree with substantial taxable income can remain in that bracket even after leaving the workforce.
That means the tax deduction you received while working may not have saved you as much as you expected over your lifetime.
Why It Can Get Worse
Pre-tax retirement savings can become an even bigger issue later in retirement because traditional retirement accounts generally cannot remain untouched indefinitely.
Required minimum distributions, or RMDs, generally begin at age 73 for traditional IRAs and many retirement plans. Those distributions generally count as taxable income, as explained by the IRS rules for required minimum distributions.
Social Security can also contribute to the problem. Depending on your income, up to 85% of your Social Security benefits may be taxable. The IRS guidance on Social Security taxation explains how provisional income determines how much of your benefits may be included in taxable income.
There is another situation that is easy to overlook: the death of a spouse. A married couple may have been comfortable filing jointly for decades, but after one spouse dies, the survivor may eventually have to file as single. At the same time, the surviving spouse may still have Social Security, investment income, and required distributions from retirement accounts. The result can be a higher tax burden on essentially the same pool of retirement assets.
Find Your Pattern
There are three basic patterns to consider when evaluating whether you have too much money in pre-tax accounts:
- Your tax rate falls after retirement. If your tax rate is substantially lower once you stop working, pre-tax savings may work very well for you.
- Your tax rate stays about the same. If you are paying roughly the same rate while working and throughout retirement, it is worth taking a closer look at whether additional pre-tax contributions are actually providing the long-term benefit you expect.
- Your tax rate falls, then rises again. You may enter retirement with several years of relatively low taxable income, only to see your tax rate increase later as Social Security, RMDs, and other income sources become larger. This is where proactive planning can become particularly valuable.
That third pattern is especially important because the years between leaving work and the point when retirement income increases can create an opportunity zone for tax planning that we addressed in our most recent blog.
PWA explores this concept in greater detail in The Opportunity Zone: Smart Tax Planning in Early Retirement, where a temporary period of lower taxable income can create opportunities to make strategic tax decisions before income rises again.
Look Beyond Retirement
Pre-tax overload is not only about what happens when RMDs begin. Having too much of your wealth concentrated in pre-tax accounts can also limit your flexibility throughout retirement.
Suppose you need a significant amount of money for a major home repair, a new vehicle, a family expense, or another unexpected need. If most of your available assets are in pre-tax accounts, taking a large withdrawal could push more of your income into a higher tax bracket.
A more diversified mix of pre-tax, Roth, and after-tax assets can give you more choices about where your retirement income comes from each year. That flexibility can become an important part of managing your tax liability.
Plan Before You Retire
The best time to identify pre-tax overload is before retirement, not after RMDs have already started. That does not mean everyone should stop contributing to a traditional 401(k) or IRA. Pre-tax accounts can be an important part of a tax-efficient retirement strategy, particularly when you are receiving a valuable deduction at a relatively high current tax rate.
The issue is balance. Depending on your circumstances, a retirement plan may include a combination of pre-tax savings, Roth savings, taxable investments, and strategic Roth conversions. The goal is to build enough flexibility into your future income sources that you are not forced to take taxable withdrawals at the worst possible time.
It is also important to look at the entire retirement timeline rather than focusing only on the first year or two after leaving work. Your tax situation at 62 could look very different from your tax situation at 73 or 85.
Avoid the Pre-Tax Trap
The goal of retirement tax planning is not simply to reduce your tax bill this year. It is to consider how much tax you may pay over the rest of your life.
That changes the question from “How much can I deduct today?” to a more important question: What combination of pre-tax, Roth, and after-tax savings could give me the lowest lifetime tax bill and the most flexibility in retirement?
If you have accumulated significant retirement savings, it may be worth examining your current tax bracket, your projected income in early retirement, and what could happen once Social Security and RMDs enter the picture.
Watch the full video to learn more about pre-tax overload and the other retirement tax traps PWA is covering in this series. If you would like help evaluating your own retirement tax strategy, contact Personal Wealth Advisory to discuss your situation.