The most common employer-sponsored retirement plan is the 401(k). Traditionally, contributions are made pre-tax, meaning you and potentially your employer set aside money for retirement before income taxes are applied. Your contributions reduce your taxable income today and help you save for the future.
But is it possible to save too much in a pre-tax account?
The ticking tax time bomb
Take John and Jane Smith, for example. They’ve worked hard, lived modestly and built up substantial pre-tax savings in their 401(k)s. At age 65, they retire comfortably. Social Security covers most of their income needs, and they withdraw from their retirement accounts only as needed. They thought they’d done everything right.
What they don’t realize is that the IRS eventually wants its share of those deferred taxes. Starting at age 75 (for those born after 1960), the IRS requires Required Minimum Distributions (RMDs) from pre-tax retirement accounts. Each year, the IRS calculates how much must be withdrawn based on your account balance and life expectancy factor.
At age 75, with a life expectancy factor of 24.6, a $2 million portfolio would require John and Jane to withdraw approximately $81,300 in that year, even if they don’t need the money. These withdrawals are taxed as ordinary income; on top of the taxes, you likely pay for Social Security benefits and any other income sources.
As John and Jane get older, the required withdrawal amount typically increases, pushing their RMD amounts higher and subsequently their taxable income. Worse, this additional income could trigger Income-Related Monthly Adjustment amount (IRMAA) surcharges—higher Medicare premiums based on income.
Don’t be scared
These all sound like bad things but are they really that bad? No! Although there are always ways to be “more efficient” or “more diversified”, having a large pre-tax investment or paying IRMAA is hardly the worst thing that could happen.
In retirement (for sake of ease, assuming age 65 or older), taxation tends to be favorable. A married couple—filing jointly (MFJ)—in retirement can utilize the standard deduction of $35,500 (in 2026) which alone turns that amount of taxable income into tax-free dollars! Some call this the “Hidden Roth IRA”.
For tax years 2025 to 2028, a separate bonus deduction of $6,000 is available per qualifying senior (up to $12,000 for MFJ). This extra deduction begins to phase out between $150,000 and $250,000 of modified adjusted gross income (MAGI). For many, this creates an even greater deduction of upwards of $47,500 of tax-free income.
After that, your dollars still must go through a progressive tax structure filling up low brackets such as 10% and 12%. To fill up the 10% and 12% tax bracket while utilizing the full $47,500 deduction, you’d need $148,300 of taxable income—an impressive amount to consider. That’s a 7% effective tax rate despite most of these dollars being taxed at 12%.
Additionally, the IRMAA surcharge only occurs when your income surpasses certain thresholds. For example, (MFJ) the first threshold isn’t until $218,000 of MAGI in which roughly an extra $1,000 of annual premiums are paid, per person. This is something to be aware of, but not something you necessarily need to fear.
Unless you have extensive recurring income in retirement, most of your taxable income from pre-tax withdrawals will be tax efficient in comparison to when you deduct it during your working years. Nevertheless, a bigger opportunity arises in the flexibility that having diversified tax buckets creates for you in retirement, allowing you to pick and choose when certain assets are taxed based on your situation.
The solution: Diversify your tax buckets
Saving in any form is a win. But lack of tax planning can lead to unintended consequences later in retirement. There is no one size fits all savings plan, which is why professional expertise can be helpful in tailoring your plan to your personal situation.
Once you’ve determined how much you can save each month and what makes sense for you, consider diversifying across different tax types (if applicable):
The Three Primary Tax Buckets
Many employer plans now allow you to split contributions between pre-tax and Roth 401(k) options. You can also use Traditional IRAs, Roth IRAs, and taxable brokerage accounts to build a more flexible retirement strategy.
Final thoughts
If you're still early in your career, using a mix of two or even all three tax buckets—pre-tax, Roth and taxable—can help you build a more flexible retirement strategy and hedge against future uncertainty and changes.
As you get closer to retirement, it becomes easier to estimate what your taxable income might look like in those years. That’s when working with a financial planner can be especially valuable. A planner can help you identify your current and future income sources, then develop a savings strategy or recommend adjustments to help you achieve your goals more efficiently.
Remember: saving is always the first step, but how you save can make a big difference. By diversifying your retirement savings across different tax types, you can:
A thoughtful savings strategy helps you prepare for both the known and the unknown of retirement.
Busey Wealth Management’s experienced team of advisors is here to help ensure you have a financial plan that works for you. Learn more about our holistic services and find an advisor near you by visiting busey.com/wealth-management.
The information and examples provided are based on the present tax landscape and may evolve as regulations change.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.