When It May Make Sense to Accelerate Taxes

Many retirement strategies are built around tax deferral. Traditional 401(k) and IRA contributions may allow savers to delay taxes today, with taxes generally due when funds are withdrawn later.[5]

That can be a powerful approach, especially during high-income working years. But tax deferral is not always the right answer for every person, every year or every financial plan.

In some cases, intentionally paying taxes sooner may help reduce future tax pressure, create more flexibility in retirement or improve how assets are passed to heirs. The right approach depends on your income, retirement timeline, account mix, estate goals and expectations for future tax rates.

Here are three situations where accelerating taxes may be worth discussing with a tax professional and financial advisor.

Scenario 1: Your Retirement Tax Bracket May Be Higher Than Expected

Many people assume they will be in a lower tax bracket once they retire. That may be true for some households, but it is not guaranteed.

Tax-deferred retirement accounts generally become subject to RMD (Required Minimum Distribution) rules later in life.[1] IRA owners generally must take their first RMD by April 1 of the year after they turn age 73, while many defined contribution plan participants must begin by the later of the year they turn age 73 or the year they retire, if the plan allows that delay.[1] SECURE 2.0 also created a future shift to age 75 based on date of birth.[2]

RMDs are generally calculated by dividing the prior year-end account balance by an IRS life expectancy factor.[1] For example, the Uniform Lifetime Table denominator for age 73 is 26.5.[2] A retiree who is age 73 and had $6 million in applicable tax-deferred retirement assets at the end of 2025 would have an estimated 2026 RMD of about $226,415 before considering any account-specific or spouse-beneficiary rules.[2]

That income may come on top of other taxable income sources, such as interest, dividends, capital gains, pension income or Social Security. Depending on total income, up to 85% of Social Security benefits may be taxable.[3]

For retirees with significant tax-deferred savings, RMDs may push taxable income higher than expected. That can affect not only federal income taxes, but also broader planning considerations such as Medicare premiums, charitable giving strategy and portfolio withdrawals.

Potential planning approach: Create more tax flexibility before RMDs begin

One way to manage future RMD pressure is to build a mix of account types with different tax treatments. That may include traditional retirement accounts, Roth accounts and taxable investment accounts.

Roth 401(k) contributions
Employees who have access to a Roth option in a workplace retirement plan may choose to make after-tax Roth contributions instead of some or all pretax contributions.[4] Roth contributions do not reduce taxable income in the year they are made, but qualified Roth distributions are generally tax-free if the account has met the five-year requirement and the distribution occurs after age 59½, disability or death.[4]

Roth accounts can also help reduce future RMD pressure. The IRS notes that Roth IRAs and designated Roth accounts are not subject to lifetime RMD requirements while the owner is alive.[1]

Roth IRA contributions
Some individuals may also be eligible to contribute directly to a Roth IRA. For 2026, the Roth IRA income phaseout range is $153,000 to $168,000 for single filers and heads of household, and $242,000 to $252,000 for married couples filing jointly.[6]

Roth conversions
A Roth conversion allows you to move money from a tax-deferred account into a Roth account. Previously untaxed amounts converted to a Roth account are generally included in gross income in the year of the conversion.[4]

The tradeoff is simple: You may pay taxes today in exchange for the possibility of tax-free qualified withdrawals later.[4] A conversion can also reduce the amount left in tax-deferred accounts that may be subject to future RMDs.

Strategic withdrawals after age 59½
After age 59½, traditional IRA distributions can generally be taken without the 10% additional tax, although taxable amounts are still included in income.[2] For some retirees, taking withdrawals before RMDs begin may help smooth income over time instead of allowing tax-deferred balances to grow unchecked.

Withdrawn funds could be used for spending needs, Roth conversion taxes or reinvested in a taxable account. Taxable accounts do not have the same tax deferral as retirement accounts, but they may offer planning flexibility, including the ability to harvest losses.

Scenario 2: Your Income Is Temporarily Lower

A lower-income year is not always welcome, but it may create tax planning opportunities.

This can happen during a career transition, a sabbatical, a business loss, retirement before RMDs begin or a year with a smaller bonus. When taxable income is lower than usual, there may be room to intentionally recognize income at a lower rate than you might face later.

Potential planning approach: Use a low-income year intentionally

Targeted Roth conversions
A lower-income year may allow you to convert a portion of tax-deferred retirement assets to a Roth account while staying within a preferred tax bracket. Previously untaxed converted amounts are generally included in income in the year of conversion.[4]

Rather than converting a large amount all at once, some individuals use a series of smaller conversions over multiple years. This can help manage the tax impact while gradually shifting assets into a Roth account.

Tax-gain harvesting
A lower-income year may also be a time to consider realizing long-term capital gains. Long-term capital gains are generally taxed at lower rates than ordinary income, and the 2026 IRS inflation guidance includes separate thresholds for the 0% and 15% maximum capital gains rates.[8]

Tax-gain harvesting may be useful when appreciated investments can be sold at a lower capital gains rate than you expect in future years. It may also allow you to rebalance a portfolio, reduce concentration or reset cost basis in a more tax-aware way.

Tax-loss harvesting
Tax-loss harvesting can also help manage the impact of realized gains. If capital losses exceed capital gains, the IRS generally allows individuals to deduct the lesser of $3,000, or $1,500 if married filing separately, or the total net capital loss against other income, with unused losses carried forward.[7]

This flexibility is one difference between taxable investment accounts and tax-advantaged retirement accounts. Losses inside retirement accounts generally do not provide the same capital-loss harvesting opportunity.

Scenario 3: You Want to Improve Tax Efficiency for Heirs

Tax planning can also affect what heirs receive and how they receive it.

For many nonspouse beneficiaries, inherited retirement accounts are subject to a 10-year distribution rule.[9] The IRS states that, for many defined contribution plan participants and IRA owners who die after December 31, 2019, the full account balance must be distributed within 10 years, with exceptions for certain eligible designated beneficiaries.[9]

Inherited traditional retirement account distributions are generally taxable to beneficiaries when received. That can create a meaningful income tax burden if heirs are in high-earning years or if a large inherited balance must be distributed within a shorter timeframe.

Potential planning approach: Consider Roth assets for legacy planning

Roth accounts may be valuable legacy assets because qualified Roth distributions are generally not included in income.[4] Inherited Roth IRAs are generally subject to the same RMD requirements as inherited traditional IRAs, but the IRS notes that withdrawals of contributions from inherited Roth IRAs are tax-free and most withdrawals of earnings are also tax-free if the Roth account meets the applicable five-year rule.[10]

That does not mean a Roth conversion is always the right estate planning move. The original account owner typically pays the conversion tax during life, so the benefit depends on several factors, including the owner’s tax bracket, the heirs’ expected tax brackets, the size of the estate, available liquidity and the time horizon for future growth.

For families with significant retirement assets, Roth conversions can be part of a broader tax diversification and legacy planning strategy.

The Role of Tax Diversification

Tax diversification means holding assets in accounts with different tax treatments.

A tax-diversified plan may include:

Pretax retirement accounts, where taxes are generally paid later.

Roth accounts, where taxes are paid upfront and qualified withdrawals may be tax-free.[4]

Taxable investment accounts, where dividends, interest and realized gains may be taxable, but investors may have flexibility around when to sell and may be able to use capital losses.[7]

Having more than one account type may provide greater control over taxable income in retirement. It can also give retirees more flexibility when coordinating withdrawals, charitable giving, Social Security, Medicare planning and legacy goals.

A Few Reminders About Roth Conversions

Roth conversions can be powerful, but they require careful planning.

Previously untaxed amounts converted to a Roth account are generally included in gross income in the year of conversion.[4]

If you have both pretax and after-tax IRA dollars, Form 8606 is generally used to determine the taxable portion of IRA distributions and conversions.[11] The Form 8606 instructions require taxpayers to include the total value of all traditional IRAs when completing the relevant calculation, which is why the taxable portion of a conversion may not be limited to only the specific dollars you intended to convert.[11]

Roth IRAs also have five-year rules. A qualified Roth IRA distribution generally requires the five-year period to be satisfied and a qualifying event, such as reaching age 59½.[5]

A separate five-year period may apply to Roth conversions. If converted amounts are withdrawn within the five-year period that begins with the first day of the tax year of the conversion, the distribution may be subject to the 10% additional tax unless an exception applies.[2]

Roth conversions are generally irreversible. The IRS states that conversions from traditional, SEP or SIMPLE IRAs to Roth IRAs made on or after January 1, 2018, cannot be recharacterized back to traditional IRAs.[12]

Final Thoughts

Tax deferral can be valuable, but it should not be treated as an automatic rule. In some situations, accelerating taxes may help create more flexibility, reduce future RMD pressure, take advantage of a lower-income year or improve the tax efficiency of assets left to heirs.

The key is to think in terms of lifetime tax planning, not just this year’s tax bill. Paying more tax today may feel counterintuitive, but in the right circumstances, it may help reduce future tax exposure or provide greater control later.

Before making Roth conversions, strategic withdrawals or gain-harvesting decisions, work with a qualified tax professional and financial advisor. These strategies can affect tax brackets, Medicare premiums, financial aid, estate planning and overall retirement income planning.

 

---

 

Sources

[1] IRS, “RMD Comparison Chart: IRAs vs. Defined Contribution Plans.”  https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans

[2] IRS, “Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).”  https://www.irs.gov/publications/p590b

[3] IRS, “Publication 554, Tax Guide for Seniors.” https://www.irs.gov/publications/p554

[4] IRS, “Roth Account in Your Retirement Plan.” https://www.irs.gov/retirement-plans/roth-acct-in-your-retirement-plan

[5] IRS, “Topic No. 451, Individual Retirement Arrangements.”  https://www.irs.gov/taxtopics/tc451

[6] IRS, “401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500.”  https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500

[7] IRS, “Topic No. 409, Capital Gains and Losses.” https://www.irs.gov/taxtopics/tc409

[8] IRS, “Internal Revenue Bulletin 2025-45.” https://www.irs.gov/irb/2025-45_IRB

[9] IRS, “Retirement Plan and IRA Required Minimum Distributions FAQs.” https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

[10] IRS, “Retirement Topics — Beneficiary.” https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

[11] IRS, “Instructions for Form 8606.” https://www.irs.gov/instructions/i8606

[12] IRS, “Retirement Plans FAQs Regarding IRAs.” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras

Case ID: 00714762

OneDigital® is a registered trademark of Digital Insurance LLC in the United States. Investment advisory services are offered through OneDigital Investment Advisors LLC, an affiliate of Digital Insurance LLC. These materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. OneDigital Investment Advisors LLC and their associates are not estate planners and cannot provide tax or legal advice. Consult your estate-planning attorney or qualified tax advisor for specific advice regarding your situation.