Should You Defer Your Taxes Until Retirement?
When it comes to taxes, there's an expensive difference between smart planning and just plain procrastination.

Tax deferral can be a powerful incentive for funding a retirement account.
It is difficult to ignore the allure of a plan that allows you to save on taxes now as you save money for retirement. This helps explain why Americans have more than $5.8 trillion invested in employer-sponsored 401(k) plans. According to a recent Harris Poll (commissioned by TD Ameritrade), Americans consider not investing in a 401(k) the biggest financial mistake one can make.
Inevitably, most folks need some motivation to save for retirement. They certainly did back in the mid-’70s and early ’80s when IRAs and 401(k)s first became available, and they still do today. It is also clear now — after decades of watching savers deal with these plans — that tax deferral can be a trap, especially for high-net-worth retirees.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A Tax Trap for the Wealthy
How can this be? We’ve been told for as long as IRAs and 401(k)s have existed that it’s smart to put as much money as possible into these tax-deferred vehicles, because most workers may be in a lower tax bracket during retirement. However, we’ve found that the higher one’s net worth is, the less likely this is to be true. People grow accustomed to a certain standard of living and want their retirement to be just as comfortable as their working years — if not more so. That requires income.
What many retirees may not realize is that even if their income requirements are the same or lower than when they were younger and working, some important tax deductions may go away as they age. Their mortgage might be paid off. Their children likely are grown and out of the house. Some retirees may be unprepared for the single-filer tax rate they must use upon the death of a spouse.
On top of that, what if tax rates go up? Our country’s record-breaking deficit spending can’t go on forever. Government spending must be cut or tax revenue increased, regardless of any “Medicare for All” or “Green New Deal” policy implementations.
What Will Your Tax Bracket Be in Retirement?
Withdrawals from tax-deferred accounts are taxed as ordinary income. Yet, we see people with a staggering percentage of their net worth in these accounts. Numerous pre-retirees and retirees come to our office and enthusiastically describe their strategy to put off taking retirement account withdrawals for as long as possible. Many plan to wait until they have to take required minimum distributions (RMDs) at age 70½. Some are excited that the proposed SECURE Act could delay RMDs to age 72.
While this strategy may seem appealing now, it may be a bad long-term decision. RMDs alone could drive some of these retirees into higher tax brackets than they were in during their working years. For some, deferring taxes is nothing more than procrastination.
It turns out that taxes are the single biggest expense for many retirees. We find they often just accept it, year after year, thinking there is nothing they can do.
Of course, that isn’t so.
Time to Get Proactive about Taxes
Investors today are trained to manage investment costs, to prepare for inflation, to think about health care and long-term care costs, but most do not know how to plan for taxes.
We recommend taking a proactive approach to taxes by obtaining a comprehensive retirement income analysis well before retirement. Using computer software, financial professionals can conduct detailed assessments of individuals’ or couples’ investments and other assets, spending needs and wants, Social Security claiming options, and other sources of income. The software then calculates the most, tax-efficient strategies to help maximize income for life and, if desired, provide a legacy for loved ones.
It is also important to become informed about tax diversification, which means putting retirement savings into three buckets: a pre-tax bucket, an after-tax bucket and a tax-free bucket.
- The pre-tax bucket includes the accounts discussed above: IRAs, 401(k)s, 403(b)s, etc., which are not taxed until you withdraw funds (and generate 1099s later).
- The after-tax bucket includes checking accounts, savings accounts, brokerage accounts and other accounts that are taxed currently and generate 1099s.
- The tax-free bucket includes Roth IRAs, Roth 401(k)s and properly structured cash value life insurance policies.
With some savings in each of these buckets, you can more easily manage your withdrawals to stay within a targeted tax bracket.
For younger workers saving for retirement, it may make sense to work with an adviser who understands and embraces the concept of tax diversification. In my opinion, it’s best to start balancing the money in those buckets sooner rather than later. The cost of tax diversification can be high if you wait until retirement to get started.
The Bottom Line
Tax-deferred accounts have a valuable role in a retirement savings plan. Every employee should take maximum advantage of employer contributions offered in a workplace plan, for example. This is free money.
Beyond that, it’s a mistake to assume it’s always best to defer your taxes until retirement. Work with a qualified professional as well as your tax adviser to carefully assess your individual situation.
Securities and advisory services offered through Sunbelt Securities, Inc. Member FINRA/SIPC. Fixed life insurance and annuities offered through Charles W. Rawl & Associates, LLC. Charles W. Rawl & Associates, LLC and Sunbelt Securities, Inc. are unaffiliated companies and neither provides tax or legal advice.
Kim Franke-Folstad contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

As president of Charles W. Rawl & Associates, LLC, Charlie Rawl has distinguished himself as a troubleshooter by implementing creative solutions to complex financial problems. He has passed the Series 6, 7, 31, 63 and 65 securities exams and holds life insurance licenses in more than a dozen states.
-
Prior Authorization Coming to Traditional Medicare Starting in 2026
The Centers for Medicare and Medicaid Services (CMS) will implement prior authorization requirements for certain traditional fee-for-service Medicare services in six states starting next year.
-
The 60-40 Portfolio Rule of Investing: Not Dead Yet?
Adding alternative investments to a balanced portfolio can smooth out returns.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial Issues
Many caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for Retirement
Cash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
-
Five Things You Can Learn From Jimmy Buffett's Estate Dispute
The dispute over Jimmy Buffett's estate highlights crucial lessons for the rest of us on trust creation, including the importance of co-trustee selection, proactive communication and options for conflict resolution.
-
I'm a Financial Adviser: For True Diversification, Think Beyond the Basic Stock-Bond Portfolio
Amid rising uncertainty and inflation, effective portfolio diversification needs to extend beyond just stocks and bonds to truly manage risk.
-
I'm a Retirement Psychologist: Money Won't Buy You Happiness in Your Life After Work
While financial security is crucial for retirement, the true 'retirement crisis' is often an emotional, psychological and social one. You need a plan beyond just money that includes purpose, structure and social connection.
-
Retiring Early? This Strategy Cuts Your Income Tax to Zero
When retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side Gig
A side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet Spot
Converting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.