A large 401(k) may look like proof that you have won the retirement game. Yet if most of that money sits in traditional, tax-deferred accounts, the IRS could eventually force you to withdraw more than you need, raising your tax bill, Medicare premiums and other retirement costs.

For millions of older Americans, the risk is concentration.

They have spent decades building traditional 401(k)s and IRAs because those accounts offered immediate tax deductions, employer matches and years of tax-deferred growth. Roth 401(k)s were either unavailable or far less common during much of their careers.

The strategy worked. The money accumulated.

The problem is that every dollar withdrawn from a traditional retirement account is generally taxed as ordinary income. Once required minimum distributions begin, retirees lose much of their ability to decide when that income appears on their tax returns.

The Retirement Account Imbalance

Traditional retirement accounts dominate the American retirement system. The Investment Company Institute estimates that IRAs held $19.2 trillion at the end of 2025, equal to 39% of all U.S. retirement assets.

Much of that money came from traditional 401(k) plans that workers rolled into IRAs after leaving an employer.

That creates a deferred tax obligation that can remain hidden for decades. A $3 million traditional IRA is not economically equivalent to $3 million in a Roth IRA or taxable brokerage account. The traditional account contains money that will eventually be shared with the government.

The eventual cost depends on future tax rates, withdrawal timing and the retiree’s other income.

Required minimum distributions generally begin at age 73 under current IRS rules. The annual withdrawal is calculated by dividing the previous year-end balance by an IRS life-expectancy factor.

At age 73, the standard factor is 26.5. That translates into a first-year withdrawal of roughly 3.77%.

Someone entering the year with $3.5 million in traditional retirement accounts could face an initial required withdrawal of about $132,000. The percentage rises as the account owner gets older.

That income is taxable even if the retiree does not need the money.

One Withdrawal Can Trigger Several Tax Bills

The federal income tax on a required distribution is only the most visible cost. A large withdrawal can ripple across several parts of a retiree’s finances.

Higher Medicare Premiums

Medicare Part B and Part D premiums rise when modified adjusted gross income crosses certain thresholds.

For 2026, married couples with modified adjusted gross income of $218,000 or less pay the standard Part B premium of $202.90 per person each month. Above that threshold, income-related surcharges begin.

A couple with income between $274,000 and $342,000 pays $405.80 per person each month for Part B. Part D surcharges apply as well.

This creates a sharp planning risk. One additional withdrawal, capital gain or Roth conversion can push a household across an income threshold and increase premiums for both spouses.

Loss of the Senior Deduction

Taxpayers age 65 and older may claim an additional federal deduction of up to $6,000 per eligible person from 2025 through 2028.

A qualifying married couple could receive as much as $12,000. However, the deduction begins phasing out when joint modified adjusted gross income exceeds $150,000.

Large required withdrawals can shrink or eliminate that benefit.

The 3.8% Investment Surtax

The 3.8% net investment income tax applies to the lesser of a household’s net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold. That threshold is $250,000 for married couples filing jointly and $200,000 for single filers.

Traditional retirement withdrawals are generally excluded from net investment income. They still increase modified adjusted gross income, however, which can expose more dividends, interest and capital gains to the surtax.

This is an easy cost to miss. The retirement withdrawal can activate an additional tax on income earned somewhere else.

Less Control Over Social Security Taxes

As retirement income rises, a larger portion of Social Security benefits can become taxable. Up to 85% of benefits may be included in taxable income for higher-income households.

Large traditional account withdrawals can therefore raise taxable income through two channels at once: the distribution itself and the additional portion of Social Security benefits pulled into the tax calculation.

The Real Risk Is Losing Control

Traditional 401(k)s and IRAs remain powerful savings vehicles. Workers receive an immediate tax benefit, investments compound without annual capital-gains taxes and employer matches can provide an instant return.

The danger appears when nearly all retirement wealth is held in the same tax category.

A retiree with money spread among traditional accounts, Roth accounts and a taxable brokerage account can choose where to obtain cash each year.

That flexibility can help the retiree remain below a Medicare surcharge threshold, manage capital gains, absorb a major expense or reduce taxes during a volatile market.

A retiree whose wealth is overwhelmingly inside a traditional IRA has fewer choices. The government eventually determines the minimum taxable withdrawal.

The issue is best understood as a tax-diversification problem.

Investors diversify stocks because they cannot predict which company or sector will outperform. Tax diversification applies the same logic to retirement accounts because no one knows exactly what tax rates, deductions or Medicare thresholds will look like decades from now.

Should Older Workers Switch Everything to Roth?

For workers in their highest-earning years, moving every new contribution into a Roth account can be expensive.

Traditional 401(k) contributions reduce current taxable income. Roth contributions are made with after-tax dollars. A worker in a high federal and state tax bracket could give up a valuable deduction today in exchange for tax-free withdrawals later.

The central question is the rate paid now compared with the expected rate in retirement.

If a worker receives a deduction at a combined 35% tax rate and later withdraws the money at 22%, the traditional contribution may produce the better result. If required distributions, investment income and future tax increases push the retirement rate above today’s rate, Roth savings become more attractive.

This comparison must include more than federal tax brackets. Medicare surcharges, Social Security taxation, state taxes and income-based deductions can change the effective cost of a withdrawal.

The best answer may involve using several account types instead of betting entirely on one future tax outcome.

Three Ways to Build More Flexibility

1. Continue Using the Traditional 401(k)

Workers in peak earning years may still benefit from maximizing traditional 401(k) contributions, particularly when they expect lower taxable income after retiring.

The 2026 employee contribution limit is $24,500. Workers age 50 and older can generally contribute an additional $8,000, while those ages 60 through 63 can make an enhanced catch-up contribution of $11,250.

Beginning in 2026, workers whose prior-year wages from the plan sponsor exceeded $150,000 must generally make catch-up contributions on a Roth basis when the plan offers catch-up contributions and has a Roth feature. They may still direct the standard $24,500 contribution to the traditional side if their plan permits it.

That rule automatically creates some tax diversification for higher-paid older workers.

2. Use Roth Contributions and Conversions Selectively

Roth accounts offer tax-free qualified withdrawals and no lifetime required minimum distributions for the original owner.

The strongest opportunity may arrive after a worker retires and before required distributions begin. Earned income falls, yet the retiree may still have several years before Social Security, pension income and required withdrawals fill the tax brackets.

During this window, the retiree can convert part of a traditional IRA to a Roth IRA and pay tax at a deliberately chosen rate.

Conversions should be sized carefully. An overly large conversion can increase Medicare premiums, reduce deductions and expose investment income to the 3.8% surtax.

The objective is to use lower tax brackets without accidentally triggering avoidable costs.

3. Build a Taxable Brokerage Account

A taxable account lacks the upfront deduction of a traditional 401(k) and the tax-free qualified withdrawals of a Roth. It provides something both retirement accounts may lack: immediate flexibility.

There are no required minimum distributions and no retirement-account penalty for accessing the money early.

Long-term capital gains are generally taxed at preferential federal rates. Many households pay 15%, while some qualify for a 0% rate and higher-income investors can face a 20% rate plus the 3.8% surtax.

Tax-efficient exchange-traded funds can also limit annual taxable distributions.

Under current law, inherited taxable investments generally receive a new cost basis tied to their fair market value at the owner’s death. Traditional retirement accounts do not receive the same treatment. Beneficiaries usually owe ordinary income tax as they withdraw inherited traditional retirement money.

That distinction can make taxable accounts valuable for both retirement flexibility and estate planning.

A Large Traditional Account Can Still Be the Right Outcome

A multimillion-dollar traditional IRA is a good problem compared with reaching retirement without enough savings.

A saver who received large deductions during high-income years, invested the tax savings and later withdrew the money at lower rates may have used the system effectively.

The mistake is assuming the account balance alone measures financial security.

Two retirees with identical net worth can have very different after-tax spending power. The retiree with multiple account types can choose when to recognize income. The retiree with nearly everything in a traditional IRA may face rising mandatory withdrawals for the rest of their life.

That control has real economic value.

The Numbers Investors Should Review Now

Mid- and late-career workers should examine five figures:

The percentage of retirement wealth held in traditional accounts. A heavy concentration signals future exposure to forced taxable income.
The projected traditional account balance at the RMD starting age. Current balances may grow substantially before mandatory withdrawals begin.
The estimated first required distribution. Dividing the projected balance by the applicable IRS factor provides a useful starting estimate.
Expected income from Social Security, pensions and investments. These income streams determine how much room remains in each tax bracket.
The gap between retirement and required distributions. These lower-income years may offer the best opportunity for controlled Roth conversions.

Investors should also model the death of either spouse. A surviving spouse eventually moves from married filing jointly to single filing status, where tax brackets and Medicare thresholds are less favorable.

A strategy that appears manageable for a couple can become far more expensive for the survivor.

The Final Word

A large 401(k) is still an achievement. The risk comes from allowing nearly every retirement dollar to accumulate behind the same tax gate.

Traditional accounts provide valuable deductions today. Roth accounts provide tax-free income later. Taxable brokerage accounts provide flexibility throughout retirement.

The strongest retirement plan may use all three.

For workers approaching retirement, the next important question is no longer how much they have saved. It is how much control they will have when the government starts deciding how much they must withdraw.