Rethinking Retirement Taxes
Traditional 401(k)s and IRAs have long been the cornerstones of retirement planning. Many people are in higher tax brackets during their peak earning years, making the upfront tax deductions of a traditional retirement account particularly valuable. In a recent article, The Wall Street Journal put the relative use of traditional and Roth accounts into perspective: at the end of 2025, traditional IRAs held approximately $15 trillion, compared with less than $2 trillion in Roth IRAs, where taxes are paid upfront and qualified withdrawals are tax-free.
For those who are still working, contributing to a Roth 401(k) or Roth IRA, when appropriate, can provide a source of tax-free income later in life and reduce reliance on taxable distributions from traditional retirement accounts. Building assets across both traditional and Roth accounts can also provide greater flexibility to manage taxable income once retirement begins.
For those who are already retired, the planning considerations are different. If a significant portion of retirement savings is held in tax-deferred accounts, retirees may want to evaluate how they fund their spending needs, when they take distributions, and whether strategies such as Roth conversions or drawing from taxable accounts could improve their long-term tax position.
Traditional retirement accounts create an important trade-off: the tax deduction is received upfront, but withdrawals are generally taxed as ordinary income. In addition, account owners must begin taking Required Minimum Distributions (RMDs) at age 73 or 75, depending on their birth year, even if they do not need the money for current spending.
For retirees with large tax-deferred balances, those required withdrawals can become meaningful over time. They may increase taxable income, push a household into a higher tax bracket, raise income-related Medicare premiums, and reduce flexibility over how retirement income is managed from year to year. One option for addressing this is a Roth conversion, particularly during lower-income years between retirement and the beginning of RMDs. A Roth conversion moves assets from a traditional retirement account into a Roth IRA, creating taxable income in the year of the conversion in exchange for future qualified withdrawals that are tax-free. Roth IRAs are also not subject to lifetime RMDs for the original owner and can provide meaningful estate-planning benefits for heirs. Because the conversion itself creates taxable income, determining if, when, and how much to convert requires careful planning. The most effective approach may be a series of partial conversions over several years rather than a single large transaction, with the goal of taking advantage of lower tax brackets without creating unnecessary tax or Medicare consequences.
Whether you are currently working or already retired, a taxable brokerage account can provide an important source of flexibility alongside traditional and Roth retirement accounts. Taxable accounts have no required minimum distributions, can be accessed at any age without early-withdrawal penalties, and may benefit from lower long-term capital gains tax rates compared with ordinary income. They can also give retirees greater control over where they draw income from each year, while appreciated assets may receive a step-up in cost basis when passed to heirs under current tax law.
Ultimately, a well-designed retirement strategy may include all three: traditional retirement accounts, Roth accounts, and taxable investments. Having multiple sources of retirement income can provide greater flexibility when managing taxes, spending needs, and estate-planning goals. At First Fiduciary, we are here to help clients evaluate trade-offs and determine the investment and tax-management strategy that best fits their individual circumstances.
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Notable Reads
The Last Picture Show
by Larry McMurty
Published in 1966, McMurtry’s depiction of a dying small Texas town and its citizens looking for a way out could have been written today. The novel is filled with emptiness, boredom, and the uneasy realization that adulthood may not offer much more than what came before it. McMurtry’s matter-of-fact tone makes even the bleakest moments feel understated, while still leaving plenty of room for humor. - AG
Don't Skip Out On Me
by Willy Vlautin
A quiet, heartbreaking story about ambition, loneliness, and the people who care for us even when we don’t know how to care for ourselves. The main character, an aspiring boxer looking to become a champion, spends so much of the book trying to become someone worthy of respect, only to realize too late the people he most needed to impress never needed convincing in the first place. Vlautin writes about working-class lives with remarkable tenderness, and his simple story lands with surprising emotional force and stays with you long after it ends. - AG
More Than A Trusted Investment Advisor
Recently, we spoke to a client who was considering a Roth conversion as part of his estate-planning strategy. His goal was to leave more tax-free assets to his heirs. Rather than converting a large amount immediately and pushing into a higher tax bracket, we discussed the potential benefit of waiting until both he and his wife were fully retired, when their taxable income could be lower and there may be a more attractive window for conversions.
If you are in a similar situation, we are here to help you evaluate the trade-offs and determine whether a Roth conversion fits into your broader retirement and estate-planning strategy.
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