Traditional IRAs' $15 Trillion Pile Creates RMD Tax Risk

Traditional retirement accounts hold roughly $15 trillion, seven times the $2 trillion in Roth IRAs, leaving affluent savers exposed to required withdrawals that begin at 3.77% of the account at age 73 and rise each year.

"When people seek retirement advice, it's often because their traditional IRAs are disproportionately large," said Ed Slott, a CPA who specializes in retirement tax planning.

The distributions are taxed at ordinary-income rates, not the lower long-term capital-gains rate, and they can trigger income-based penalties. A couple in their mid-70s with $3.5 million in traditional IRA assets and $260,000 of total income — including $140,000 of required withdrawals they don't need — faces higher Medicare IRMAA premiums, loses $12,000 of senior deductions enacted last year, and owes the 3.8% surtax on part of their investment income.

The fix for mid- and late-career workers is to shift savings into accounts that don't force withdrawals — Roth 401(k)s and IRAs or taxable brokerage accounts — but timing matters. "Couples in peak earning years shouldn't rush into Roth 401(k) and IRA additions or conversions, because the tax rate at that point is usually too high for Roth contributions to make sense," said Edward McQuarrie, a professor emeritus at Santa Clara University who studies retirement strategies.

The $24,500 Catch-Up Constraint

For 2026, the traditional 401(k) contribution limit is $24,500 for workers who earned more than $150,000 in 2025, because the catch-up contribution for those 50 and older often must go to a Roth 401(k). Savers who expect retirement withdrawals to be taxed at a lower rate than today should keep contributing to a traditional 401(k) up to the limit to capture the deduction, McQuarrie said. Those who expect a higher rate later should consider Roth 401(k)s and IRAs, where withdrawals are typically tax-free and not required for the owner or spouse.

Roth 401(k)s carry their own limits. Employees typically can't roll a Roth 401(k) into a Roth IRA until they turn 59½ or leave the company, and company plans allow only limited withdrawals. McQuarrie advises savers who want more in Roth accounts to use a mega-backdoor Roth 401(k) after maxing out the traditional deduction.

Taxable Accounts as a Third Option

A taxable brokerage account offers a middle path. Dollars going in are after-tax, but principal grows tax-free until sold, when long-term capital gains are taxed at rates as low as 0 percent or as high as 23.8 percent, with many taxpayers owing 15 percent. There are no forced withdrawals and no penalties for early payouts, and if the investment is held until death, no capital-gains taxes are due under current law.

The trade-off is annual taxes on distributions such as dividends, though low-fee exchange-traded funds tend to keep those small. The strategy also carries execution risk: a couple in their late 50s with $1.5 million in pretax 401(k)s and $400,000 in a taxable brokerage account told MarketWatch they plan to use excess cash to pay taxes on Roth conversions while staying within the 22 percent federal bracket, rather than withholding from the converted amount.

The stakes are rising as balances grow. Traditional IRAs held about $15 trillion at the end of 2025 versus $2 trillion in Roth IRAs, according to IRS data and estimates by the Investment Company Institute. Retirees who fail to plan face compounding penalties — a 73-year-old who missed a $10,000 401(k) required distribution owed a 25 percent excise tax, reduced to 10 percent if corrected promptly, because 401(k) RMDs cannot be aggregated with IRA withdrawals. For affluent savers, the choice of where to park the next dollar now determines how much of it survives the withdrawal phase.

This article is for informational purposes only and does not constitute investment advice.