Say you’re near retirement and have accumulated $1 million in your 401(k). Congratulations: You’re in the top tier of retirement savers. But remember, not all that money is yours — some of it will be taxed by the federal government when you withdraw it.
Most people put their retirement savings in traditional 401(k) plans and individual retirement accounts. And most contributions to these accounts are tax deferred. That enhances returns by allowing your investments to compound without a tax burden — and they reduce your income tax bill in your higher-income working years.
But more-affluent retirees may find that drawing from these traditional accounts in retirement can have some undesirable side effects, including higher marginal tax rates, taxes on Social Security benefits and surcharges on Medicare premiums. And leaving tax-deferred accounts to your heirs can create tax headaches for them.
Taxes on these accounts cannot be avoided completely. “We have to pay taxes sometime,” says Wade Pfau, an expert on retirement income and author of the Retirement Planning Guidebook. “It’s really just a matter of looking for opportunities to pay taxes at the lowest possible rates.”
Cue the Roth account.
Unlike traditional 401(k)s and I.R.A.s, Roth I.R.A.s and Roth savings options within workplace plans are funded with after-tax dollars — in other words, you pay the income tax bill upfront. Like a traditional 401(k) or I.R.A., your investments grow tax-free. Unlike tax-deferred accounts, Roth withdrawals are generally tax-free too, if used as intended in retirement or by your heirs.
Roths also offer a way to hedge your bets against possible higher tax rates in the future, said Ed Slott, a tax expert and Roth guru.
“Most older people are heavily overweighted in tax-deferred accounts — they have no tax risk diversification,” Mr. Slott said. “These are sophisticated investors who would never put all their eggs in one basket, because that’s a basic rule of investing — yet all their eggs are in one tax basket, so they’re at the mercy of a possible future higher tax bill.”
Most retirement savings reside in tax-deferred accounts. In 2024, investors saved $14 trillion in traditional I.R.A.s, versus $2 trillion in Roths, according to the Investment Company Institute.
But the Roth is gaining popularity. The $2 trillion held in Roths in 2024 accounted for 12 percent of all I.R.A. assets — up from just 4 percent in 2004. In 401(k) plans, 18 percent of savers in plans that offered a Roth option used it in 2024, up from 12 percent in 2019, according to Vanguard.
The reduced tax rates passed during the first Trump administration, and made permanent in last year’s tax law, may play a role in that growth. “We’re at historic lows now, and I don’t see taxes going any lower than this,” Mr. Slott said.
Changes made to federal retirement law since 2019 encourage the use of Roth options within workplace retirement savings plans, and have made Roths more compelling for people who don’t expect to spend down all their savings and want to give these assets to their heirs.
Here’s a look at how Roths work.
Who are Roths good for?
You might expect your tax bills to be lower in retirement, since you’ll no longer have taxable wages. And that is the case for most retirees, according to research by the Investment Company Institute and the Internal Revenue Service.
But retirees with large nest eggs may see their tax bills rise — especially after they start taking required minimum distributions, which begin at age 73. R.M.D.s can force larger-than-desired withdrawals that push you into higher tax brackets. You’re no longer contributing to a 401(k), so that pretax deduction disappears. So do deductions for mortgage interest, if you’ve paid off your home, and most likely deductions for dependent children. Deductible state and local taxes may be lower.
“Many people who have large I.R.A.s will probably be in a higher bracket in retirement,” Mr. Slott said — even if tax rates don’t change in the years ahead.
Along with higher-income tax brackets, higher taxable income in retirement can trigger a larger bite from your Social Security benefits because higher-income retirees pay tax on up to 85 percent of their benefits. Higher-income retirees also pay higher premiums for Medicare Part B (outpatient care) and Part D (prescription drugs). These so-called Income Related Monthly Adjustment Amounts can increase Medicare costs substantially.
There are multiple surcharge levels, defined by your modified adjusted gross income. This year, the first bracket raises the standard monthly Part B premium of $202.90 by $81.20 — and the second bracket doubles the standard premium amount.
Retirement drawdowns from Roth accounts generally don’t count toward adjusted gross income — and no R.M.D.s are required during your lifetime. That can help retirees manage their tax bills.
Ways to contribute to Roth accounts
Contributing to a Roth I.R.A. can make sense for younger retirement savers, since they tend to be in their lower-earning years and are in lower tax brackets, making tax deferral less valuable. But there are income limits on Roth contributions — this year, single filers with income up to $153,000 can contribute the full amount ($7,500), and the contribution limit phases out when your income hits $168,000.
Savers with incomes higher than those amounts can make “backdoor” Roth contributions. You can make a nondeductible contribution to your I.R.A., and then convert the contribution to a Roth.
Much larger Roth contributions can be made within workplace retirement plans, since these are subject to the $24,500 limit that applies to tax-deferred contributions this year — and there is no income cap on your eligibility to contribute. Savers ages 50 and older can contribute an additional $8,000 in catch-up contributions this year — although the Secure 2.0 law passed in 2022 requires that 2026 catch-up contributions be made using a Roth option for workers who earned more than $150,000 in 2025 from the employer sponsoring the plan. (The $150,000 is adjusted for inflation in future years.)
Secure 2.0 supercharges the Roth 401(k) opportunity for savers ages 60 to 63 — they can make a higher catch-up contribution this year of $11,250. Depending on your employer’s match, the total going into a Roth 401(k) this year could be as high as $72,000 — plus any catch-ups.
Nearly all workplace plans, 95.6 percent, now offer Roth options, according to the Plan Sponsor Council of America.
Conversions
Converting tax-deferred assets to a Roth I.R.A. offers a way to plan for future taxes.
There’s no limit on how much you can convert in a given year, but the converted amount is taxable — and paying the tax from a non-retirement account preserves the Roth’s full value and maximizes tax-free compounding. Conversions in retirement can also trigger higher taxation of Social Security benefits or high-income Medicare surcharges in the year that you convert.
While you’re working, look for opportunities to convert smaller amounts that “fill up” the top of your highest marginal tax bracket. The early years of retirement can be a good time to convert, especially if you have not yet claimed Social Security, says Nancy Gates, lead educator at Boldin, a financial planning platform. “Those are likely to be low-tax years — a tax valley. And then I’m going to start drawing down that money or convert it to Roth, because that tax mountain is coming. It’s a good way to minimize your lifetime tax, and control your tax rate.”
But any Roth strategy should be geared to a specific planning goal, such as leaving the highest estate value or achieving the lowest lifetime tax liability. “Anyone considering a Roth conversion really needs to be clear about the goal,” Ms. Gates said. Boldin offers an online Roth conversion explorer tool that helps clients project long-term effects of various Roth strategies.
Leaving a Roth to your heirs
If you don’t expect to spend down your tax-deferred retirement savings during your lifetime, consider incorporating Roth assets into your estate plan. “When we talk about paying taxes at the lowest possible rate, that doesn’t only apply to you,” Mr. Slott said. “Other people may be paying those taxes besides you.”
Those people include widowed spouses, who can find themselves in higher marginal tax brackets once they are no longer filing joint tax returns. The household will have one less Social Security check coming in, but R.M.D.s on tax-deferred accounts stay the same.
If you plan to leave tax-deferred assets to your children, it’s difficult to predict the tax bill they will pay. In 2019, the Secure 1.0 law eliminated the “stretch I.R.A.,” which allowed heirs to take distributions from inherited I.R.A.s in small amounts over their lifetimes. Now, they must take all those distributions no later than 10 years after they are inherited — and those might well be career-high earning years for them. “In year 10, it’s a 100 percent R.M.D. — everything comes out,” Mr. Slott said. That can put your heirs into their highest tax rates, he added.
Inherited Roth I.R.A.s also must be drawn down within 10 years — but the tax bite is gone. Keeping the money invested until the last year can be a great move for your heirs, Ms. Gates said.
“That money can grow in the Roth for 10 years after you die — it’s unbelievable.”
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