As of July, the average 401(k) balance for someone in their 50s was $642,696, according to Empower. And the number of 401(k) millionaires also reached a record-high last year, coming in at 645,000.
Meanwhile, Empower found that Americans in their 50s now hold an average $483,451 in their Individual Retirement Accounts (IRAs).
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If you’re one of them, congratulations. But before you start making plans for what to do with that sizable balance, you’ll want to pump the brakes. That’s because since these are tax-deferred accounts, the IRS is eventually going to come knocking for its share of your stash.
Waiting until you’re forced to take your required minimum distributions (RMDs) can push you into a higher tax bracket, impacting the taxes on your Social Security benefits and even increase your Medicare premiums. If you’re caught unprepared, a major tax bill could blow up your entire retirement plan.
A little advanced planning can save you big bucks in the long run. Here are three easy strategies to help you defuse this ticking time bomb before it goes off.
1. Tax gain harvesting
One way to start defusing the problem is by taking advantage of capital gains’ preferential tax treatment. In 2026, capital gains are taxed at 0% up to $49,450 for an individual and $98,900 for a married couple filing together. But if your income for the year exceeds those thresholds (up to $545,500 and $613,700, respectively), you’ll face a 15% capital gains tax.
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 — 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 (or 75 if you were born after 1960), particularly if your income (and therefore your tax rate) is temporarily lower.
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For example, in 2026, the marginal income tax rate is 22% for a couple filing jointly with an income between $100,801 to $211,400. So, if you and your partner earn $150,000 this year, you could convert another $61,400 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.
Starting next year, Americans over the age of 50 earning more than $150,000 will actually be required to make their catch-up contributions to a Roth account — not pretax. This new rule aims to help shrink high earners’ future tax-deferred balances.
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.
In other words, if you die with sizable balances in your IRA and 401(k), your heirs will 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.
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.
— with files from Sigrid Forberg
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This article originally appeared on Moneywise.com under the title: Millions of Americans have a ticking time bomb in their tax-deferred accounts — 3 easy ways to start defusing it now
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
