Millions of Americans have a ‘ticking time bomb’ in their 401(k)s and IRAs — 3 easy ways to defuse it before retirement

If you have a sizable balance in your 401(k) or IRA, it’s natural to think of that entire amount as part of your nest egg. But there’s a catch: because these accounts are tax-deferred, the IRS will eventually want its share. Over time, that deferred bill can grow quietly in the background — a ticking time bomb waiting to go off in retirement.

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As of August 2025, the average 401(k) balance for someone in their 50s was $622,566, according to Empower (1). Meanwhile, there are roughly 595,000 Americans with more than $1 million in their 401(k), according to Fidelity (2). The number of IRA-created millionaires also reached a record-high in the second quarter of 2025 at 501,481.

Simply put, millions of Americans are sitting on savings that could trigger large tax bills later in life. Without proactive planning, required minimum distributions (RMDs) can push retirees into higher tax brackets, increase taxes on Social Security benefits, and even raise Medicare premiums.

If you’re facing a similar financial time bomb, here are three things you can do to defuse it.

1. Tax gain harvesting

One way to start defusing the problem is by taking advantage of capital gains’ preferential tax treatment. In 2025, capital gains are taxed at 0% up to $48,350 for an individual and $96,700 for a married couple filing together (3).

By strategically tapping your tax-deferred accounts and selling appreciated investments within these thresholds, you can “harvest” gains at low or even zero tax cost. Spreading withdrawals and sales out gradually (over 10 or 15 years, for instance) can shrink your tax-deferred balances and reduce future RMDs, preventing a larger tax hit later on.

2. Roth conversions

Another smart way to manage future tax exposure is through Roth conversions. Under specific conditions, Roth IRAs do not have required minimum distributions (RMDs) for the original owner (4) — and withdrawals in retirement are tax-free. This is why the Roth conversion strategy is so popular with affluent retirees looking to minimize their tax bill.

Converting portions of your tax-deferred savings into a Roth means paying taxes now so your money can grow tax-free later. This can be especially valuable in the “gap years” between retirement and when RMDs begin at age 73, particularly if your income (and therefore your tax rate) is temporarily lower.

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For example, in 2025, the marginal income tax rate for a couple filing jointly is 22% under a combined income of $206,700 (5). So, if you and your partner earn $150,000 this year, you could convert another $56,700 from a traditional IRA or 401(k) into a Roth IRA and still stay in the same tax bracket. Over time, strategic conversions like this can greatly reduce your future tax burden.

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3. Plan for your terminal tax rate

Tax and retirement planning doesn’t end with your lifetime. It’s easy to overlook the fact that your tax and retirement planning doesn’t just impact you, but also your dependents and loved ones. Based on the SECURE Act, beneficiaries of tax-deferred accounts must deplete the accounts within 10 years of the account holder’s passing (6).

In other words, if you pass away with sizable balances in your IRA and 401(k), your heirs would be subject to strict RMDs and face the tax liabilities themselves.

To minimize these costs, consider hiring an experienced estate planner to help you smooth out this terminal tax spike. With professional assistance, you could include sophisticated maneuvers such as Qualified Charitable Donations (QCDs) and trust funds in your estate plan that help minimize the tax burden on your loved ones after you pass (7).

Large pre-tax balances can quietly inflate your future tax bill — but with early planning, they don’t have to. By harvesting gains strategically, making timely Roth conversions, and designing your estate plan thoughtfully, you can reduce lifetime taxes, keep Medicare premiums under control, and pass more of your wealth to the people and causes you care about.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.*

Empower (1); Fidelity (2); CNBC (3); SmartAsset (4); Bipartisan Policy Center (5); IRS (6); Feldman Law Group (7)

This article originally appeared on Moneywise.com under the title: Millions of Americans have a ‘ticking time bomb’ in their 401(k)s and IRAs — 3 easy ways to defuse it before retirement

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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