Avoid the 401(K) and IRA ‘Tax Time Bomb’ by Going All-In on Roths, Expert Says

Saving for retirement is essential for long-term success and financial comfort, but one expert says you may be going about it wrong.

The two most popular retirement investment vehicles are 401(k) accounts and IRAs, which each have traditional and Roth versions. Traditional accounts are funded with pre-tax dollars, which are taxed upon withdrawal, while Roth accounts are funded with after-tax contributions, so the money grows tax-free and withdrawals are tax-free. Additionally, Roth accounts are exempt from required minimum distributions.

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Generally, investors who think they’ll be in a lower tax bracket in retirement, such as high-income earners, may prefer traditional accounts, while people early in their careers who aren’t yet earning peak income may opt for a Roth.

Ed Slott disagrees, saying Roth accounts are available to anyone, anytime. The CPA of his eponymous firm, which specializes in IRA investment and analysis, is the author of “The Retirement Savings Time Bomb Ticks Louder: How to Avoid Unnecessary Tax Landmines, Defuse the Latest Threats to Your Retirement Savings, and Ignite Your Financial Freedom.” Slott says savers will likely end up paying more if they wait to pay taxes on their distributions.

Current tax rates set by the Tax Cuts and Jobs Act are also set to disappear at the end of 2025, and it’s not yet clear what the new rates or brackets will be.

Slott says he’s seen the repercussions of waiting before. While working on a tax return for a client who preferred a traditional retirement account during his peak earning years, he found that his client’s income was higher in retirement than during his peak earning years because his IRA had grown so much and the required minimum distributions were higher than the income he had when he was working. His client was shocked, but he wasn’t.

Slott spoke with MarketWatch about how to know if a Roth account is right for you, what to do if you don’t have a Roth 401(k) option at work and how to weigh the pros and cons of a tax bill in the present.

The story continues

MarketWatch: Why did you write this book?

Ed Chateau: The biggest one is the tax time bomb. Taxes that people don’t realize are piling up in IRAs and 401(k)s. That money hasn’t been taxed yet. You get deductions as you contribute and that’s the deal. You get the deductions up front and like any deal with the devil, there’s a day of reckoning – that’s when you have to take that money out. What I’m afraid of is a future tax increase. Given the state of the national debt, if Congress ever decides to do something about it, they may never do it, but let’s say they get serious about it, there will be a critical moment. The people most at risk of tax increases are the…