On a recent Earn Your Leisure episode titled “Retire Rich The Ultimate Guide to IRAs, 401(k)s, & HSAs!”, a guest delivered the line every traditional 401(k) saver needs to hear: “If you have, let’s say, $1 million in retirement and you took out that whole million dollars at one time from your 401k, you would get like $600,000 net because that is fully taxable.”
If you have spent two decades maxing a pre-tax 401(k) and watching the balance climb, that sentence should reset your retirement math. The seven-figure number on your statement is partly a sizable IOU to the IRS.
The Math Is Brutal
Every dollar inside a traditional 401(k) is taxed as ordinary income on the way out. Pull the entire $1 million in a single year as a single filer and you crash through every federal bracket at once.
Under the 2026 brackets, the top 37% federal rate applies to income above $640,600 for a single filer. The lower slices stack underneath: 35% on income over $256,225; 32% over $201,775; 24% over $105,700; 22% over $50,400; 12% over $12,400; and 10% on the first $12,400. The standard deduction for single filers in 2026 is $16,100, so almost the entire million remains taxable, with the bulk landing in the 32%, 35%, and 37% brackets.
Retirees over 65 can claim an additional standard deduction of $2,050 and, under the One Big Beautiful Bill Act, a separate $6,000 senior deduction available through 2028, which phases out at a 6% rate for those earning over $75,000. Even with those offsets, a single lump-sum withdrawal of $1 million would still face a punishing effective rate.
Add a state with a 5% to 10% income tax and the guest’s $600,000 net estimate is roughly where you land. A combined 40% haircut on a one-shot withdrawal is the realistic base case.
The Roth side mirrors this in reverse: “If you have the Roth, if you have a million dollars hypothetically and you took out all the million dollars at one time, you would get $1 million because it’s not taxable.” You paid the tax on contributions going in, so the IRS has no further claim on the growth.
The Single Factor That Decides Roth vs. Traditional
Whether your tax rate in retirement will be higher or lower than it is today determines which account wins. That is the whole decision, and everything else is detail.
Consider a 35-year-old earning $120,000. Their top dollar is taxed at 24%. A $20,000 traditional 401(k) contribution saves roughly $4,800 in federal tax this year. Retiring at 65 with $1 million and drawing $80,000 annually puts their effective federal rate closer to 12% to 15% after the standard deduction and the new senior deduction. Traditional wins.
A 28-year-old in California earning $70,000, with their top dollar in the 22% bracket and strong income growth ahead, will likely retire at a higher rate. Roth contributions lock in 22% today and shield decades of compounding from future tax increases. Roth wins.
The One Big Beautiful Bill Act permanently extended the TCJA ordinary income tax structure, which removes much of the uncertainty that once argued for Roth contributions as a hedge against expiring rate cuts. The brackets savers face today are now set to remain. That makes the comparison more mechanical: estimate your current marginal rate, estimate your retirement income, and act accordingly.
The traditional 401(k) is ultimately a wager that your future self will be poorer in tax terms than your present self. For high earners currently in the 32% bracket who expect to live well in retirement, that wager often loses.
A 2026 Rule Change High Earners Cannot Ignore
Starting in 2026, employees whose prior-year FICA wages exceeded $150,000 must make all catch-up contributions as Roth deferrals. Pre-tax catch-up contributions are no longer permitted for these workers. If a plan does not allow Roth elective deferrals, affected employees cannot make catch-up contributions at all. This change is prompting many employers to add Roth options to their plans.
The employee deferral limit for 2026 is $24,500 for both traditional and Roth 401(k) accounts combined. Workers 50 and older can contribute up to an additional $8,000. Those aged 60 through 63 can contribute up to $11,250 under the SECURE 2.0 super catch-up provision, if their plan allows.
For high earners who had been using traditional catch-up contributions to compress taxable income, this rule ends that option. The upside is that those forced contributions grow tax-free and require no tax on withdrawal.
The Capital Gains Cliff
The same segment flagged a second tax cliff for investors outside retirement accounts. Short-term gains on positions held a year or less are taxed as ordinary income and can run as high as 37% federally, or into the upper 30s with state tax layered on. Long-term gains on positions held more than a year typically sit at 15%, or 20% at the top end. The guest’s framing was direct: “20% difference if you just hold long-term.”
Selling on day 365 versus day 366 of a $50,000 gain is a five-figure decision. In a taxable brokerage account, the calendar is part of the strategy.
State Tax and Default Strategies
State tax is the silent partner in every withdrawal decision. A retiree pulling $80,000 a year from a traditional 401(k) in New York hands over thousands more annually than the same retiree in Florida, which is why so many retirees relocate to Florida for its lack of state income tax. The federal bill follows from the brackets. The state bill is a choice made before the first withdrawal ever clears.
For savers paralyzed by investment options, the show pointed to target date funds, named by retirement year like 2030, 2040, or 2050, which automatically rebalance from aggressive to conservative allocations as the target date approaches. They are not optimal for every saver, but they beat sitting in cash waiting for a better moment.
What To Do This Week
- Log into your 401(k) and check whether your plan offers a Roth option. Many do, and most participants never switch it on. The 2026 contribution limit is $24,500 combined for traditional and Roth 401(k) contributions.
- Estimate your current marginal federal bracket using the 2026 brackets, then estimate your taxable income in retirement. If retirement income looks lower, keep contributing traditional. If it looks higher or uncertain, route new contributions to Roth.
- If you are 50 or older and earned more than $150,000 in FICA wages in 2025, your 2026 catch-up contributions must go to Roth by law. Confirm your plan offers a Roth option before year-end.
- Run a withdrawal simulation: take your current pre-tax balance, assume a 4% annual draw, and apply your projected retirement bracket plus state tax. That number is your real retirement income, not the gross figure on your statement.
- For any taxable brokerage positions sitting on gains, check the purchase date before selling. Crossing the one-year-and-a-day line changes the rate from ordinary income to 15% or 20%.
The balance on your 401(k) statement is a gross figure. Every meaningful retirement plan starts with the net.
Editor’s note: This article was updated to reflect the 2026 401(k) contribution limit of $24,500, the new SECURE 2.0 mandatory Roth catch-up rule for workers earning over $150,000, the One Big Beautiful Bill Act’s permanent extension of current tax rates, and the new $6,000 senior deduction for taxpayers aged 65 and older.
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