Taxes
Published March 17, 2026 by Harbor Point Advisors
I sat across from a couple a while back. Both worked hard their whole careers. Both maxed out their 401(k)s every year. They were proud of it. And they should have been. That kind of discipline is rare.
But when I pulled up the numbers and showed them what they would actually take home in retirement after taxes, one of them got quiet and said, "Nobody ever showed us that."
That conversation is why I wrote this.
A contribution to a traditional 401(k) or IRA can reduce taxable income now, while withdrawals are generally treated as ordinary income later. That means the tax is postponed rather than eliminated. The effect on your future taxes depends on withdrawals, other income, deductions, and tax law.
The Deduction Feels Like a Win. Until It Doesn't.
Every year you put money into a 401(k) or traditional IRA, you get a tax deduction. Your taxable income goes down. Your tax bill drops. You feel smart, and honestly, your advisor probably told you this was the goal.
Here is what nobody explains: that deduction is not free. You are not avoiding taxes. You are postponing them. And when you finally go to collect the money you worked decades to build, Uncle Sam will be right there waiting for his cut. Every dollar you pull out gets taxed as ordinary income. The growth, the contributions, all of it.
Tax-deferred is really just a polished way of saying tax-procrastinated.
Think back to your school days. When did procrastinating a big project ever make things better? Procrastinating only tends to compound problems. And when it comes to your money, the only compounding you want is positive interest.
Deductions can change as a mortgage is paid off, children leave home, business write-offs end, and 401(k) contributions stop. That may leave fewer offsets when retirement withdrawals begin. Your deductions and taxable income are personal and should be evaluated with a qualified tax professional.
The Deductions You Counted On Will Not Be There
Here is something most people do not think about until it is too late. The deductions that made your tax-deferred strategy work during your working years are quietly disappearing as you approach retirement.
Your mortgage is paid off. The kids are grown and gone. You stopped contributing to the 401(k), so that deduction is gone too. Business write-offs, gone. What you are left with is a pile of tax-deferred money and fewer tools than ever to protect it from taxes.
So at exactly the moment you start pulling money out, you have less protection than any other point in your life. That is the trap. You built it slowly, one good-feeling tax deduction at a time.
The Math Nobody Shows You
The spendable amount from a 401(k) withdrawal can be less than the amount taken out because traditional withdrawals are taxable income. Other income and tax rates can affect the net amount. Your result depends on your withdrawals, income sources, location, deductions, and applicable tax rules.
Let's put some real numbers on it. Say you have a million dollars in your 401(k). It is earning 10% a year, which means about $100,000 in annual interest. Sounds great.
But that $100,000 is not yours. Not all of it. If you and your spouse have other income coming in like Social Security, a pension, or rental income, that $100,000 in withdrawals could push you into a 27% to 29% tax bracket. At 29%, you net around $71,000. Nearly $30,000 goes straight to taxes on money you already earned.
Want $100,000 in spendable income? You have to pull out closer to $137,000 from your account. If you live in California or New York, try $150,000.
Now your million dollars is not earning enough to cover what you are pulling out. You start drawing down principal. The account shrinks. And the government keeps taking its share the whole way down.
At a 27% marginal rate, you would need to withdraw $137,000 just to net $100,000. In high-tax states like California or New York, the number is closer to $150,000.
Then the Government Forces Your Hand
Required minimum distributions are withdrawals the IRS requires after a specified age, even if you do not need the income. Those withdrawals can affect taxable income. The applicable age, amount, timing, exceptions, and penalties are tax-rule questions that should be confirmed with a qualified tax professional.
If you thought you could just leave the money alone and avoid the tax bill, the IRS has other plans. Once you hit the required minimum distribution age, currently age 73, you have to start pulling money out whether you need it or not. And if you do not, the penalty is steep.
Every year, the IRS tells you the minimum amount you must withdraw based on your account balance and your life expectancy. You do not get to choose. You do not get to wait for a better tax year. You take it, you pay the tax, and if you do not need the income, you get to watch money you did not want to spend get taxed and then just sit somewhere earning less.
The R in RMD stands for Required. That is not a suggestion.
Let's Do the Math. $10,000 a Year for 30 Years.
Consider a 30-year contribution example that contrasts upfront tax deductions with taxes that may be due on later traditional-account withdrawals. It shows that account balance is not the same as after-tax spending power. The figures are illustrative assumptions, not a prediction of an individual's outcome.
Here is the scenario most people actually live. You contribute $10,000 a year to your 401(k). You do it faithfully for 30 years. Your advisor tells you it is one of the smartest things you can do. And at the time, it feels true.
You get a tax deduction every year. At a 24% federal tax bracket, each $10,000 contribution saves you $2,400 in taxes that year. Over 30 years, the total deductions add up to $300,000 in contributions and roughly $72,000 in cumulative tax savings. That is real money. That feels like a win.
But here is what that account actually looks like after 30 years of compounding at an average 7% annual return: just over $944,000. Call it close to a million dollars. And every single dollar in that account is pre-tax money the IRS has never touched.
THE DEDUCTION SIDE THE DISTRIBUTION SIDE
$10,000/year contributed
30 years of contributions
$300,000 total out of pocket
24% tax bracket (federal)
Annual tax savings: $2,400
Total deduction benefit:
~$72,000 saved in taxes 7% avg annual return
Account value at year 30:
~$944,000
At 27% effective tax rate on distributions:
Tax owed on full balance:
~$255,000
3.5x what you saved up front
You saved $72,000 in tax deductions on the way in. You will owe roughly $255,000 in taxes on the way out. That is not a tax benefit. That is a tax loan with compound interest that accrues for 30 years, payable in full at retirement.
And that assumes tax rates stay exactly where they are today. Which, given the direction of the national debt, is probably the most optimistic assumption in this entire article.
Now add the reality that your deductions shrink right as your withdrawals grow. The mortgage is gone. The kids are gone. The contribution deduction is gone. You have more taxable income and fewer ways to offset it than at any other point in your working life.
The deduction was never the win they told you it was. It was a down payment on a much larger bill.
You saved roughly $72,000 in tax deductions over 30 years. The tax bill waiting on the other end: $255,000. That is not tax savings. That is a tax loan. With 30 years of compound interest attached.
You Made Uncle Sam Your Business Partner
Here is an analogy I use with clients. Imagine someone approaches you with a business deal. They say: you do all the work, I take a third of whatever you build. If the business has a bad year, that is your problem. I do not share in the losses. But when you go to sell, I get my cut no matter what. And if you try to sell before a certain age, I charge you an extra 10% on top of my third. And if you wait too long to sell, I will force you to start liquidating on my schedule.
Most people hear that and say, absolutely not. That is a terrible deal.
That is your IRA. That is your 401(k).
You did all the work. You made all the contributions. You watched it grow. And the government, who designed these accounts, has a permanent lien on every dollar in there. They are counting on that tax revenue. Why would they ever tell you there was a better way?
IRAs can create future tax revenue for the government. The question worth asking is: what is the after-tax value of your account?
What Your "At-Retirement" Tax Bill Actually Looks Like
A 401(k) need not be abandoned, especially when an employer match is available. Look beyond the deduction and consider the after-tax value of retirement income. Any decision about contributions, withdrawals, or alternative strategies should follow an individualized review of your taxes and goals.
One of the first exercises I walk clients through is calculating their at-retirement tax bill. Not the balance in the account. The actual spendable income after taxes, over the full arc of retirement.
When you add it up across a 20 to 30 year retirement, including RMDs, the number is almost always shocking. Clients who built $750,000 in tax-deferred accounts, assuming they take only RMDs, can end up paying $250,000 to $500,000 in taxes over the course of their lives on money they earned decades earlier.
Half a million dollars. To the government. On money they already earned. On money that sat and grew while they thought they were getting ahead.
Every single one of my clients who has gone through this exercise has said some version of the same thing: why did nobody show me this sooner?
There Is a Better Way to Think About This
This is not an article about abandoning your 401(k) entirely. If your employer matches contributions, consider the match as part of your overall retirement plan. The value of that choice depends on the match terms and your situation.
But the match is where the conventional wisdom should stop. Beyond that, there are strategies most financial advisors either do not know about or are not incentivized to share. Strategies where your money grows without taxes year over year, and where what you pull out in retirement does not count as income because of how the IRS categorizes certain distributions.
The goal is not to avoid paying taxes forever. It is to pay taxes on the seed instead of the harvest. Pay a smaller amount now, on the front end, while you have more control. Versus paying a larger amount on the back end, on decades of growth, at whatever tax rate the government decides is fair at that point in time.
Given the direction of the national debt, asking whether tax rates will be higher or lower in 20 years is not a difficult question to answer.
Pay taxes on the seed, not the harvest. A smaller known amount now versus a larger unknown amount on decades of growth at whatever tax rate the government decides later.
The Conversation Worth Having
Start by mapping the after-tax income a retirement account may provide rather than looking only at its balance. Include withdrawals, other income, deductions, and RMDs over retirement. This is an educational planning exercise and should be completed with qualified financial and tax professionals.
If you have never sat down and mapped out what your actual after-tax income looks like in retirement, that is the conversation to start with. Not allocation. Not risk tolerance. Not which fund to be in.
The conversation about how much of your retirement account you actually get to keep.
Most people have never seen that math. Once they do, everything changes.
If you want to run the numbers on your own situation, that is exactly what we do at Harbor Point Advisors. No pitch, no pressure. Just clarity on what you are actually working with.
Harbor Point Advisors
406-539-3423 | adam@harborpointadvisors.org
This article is for educational purposes only and does not constitute tax or financial advice. Consult a qualified professional before making financial decisions.
This article is educational and general in nature. It is not tax, legal or investment advice and does not account for your circumstances. Any tax rules described reflect current law, which can change. Talk with a qualified tax, legal or financial professional about your own situation.
Harbor Point Advisors. Bozeman, Montana. (406) 539-3423. Serving clients nationwide.
Harbor Point Advisors is an insurance agency. Adam Stevens is a licensed insurance professional, license number 3004330767, NPN 22297129. Not a registered investment adviser or broker-dealer.
This article is educational and is not individualized investment, tax, or legal advice.