What Happens When All Your Retirement Money Has Never Been Taxed

I recently started reading The Power of Zero by David McKnight. I’m only about halfway through, but it’s already reinforced something I see in almost every client meeting: the vast majority of people have all of their retirement savings sitting in accounts that have never been taxed.

Traditional 401(k)s, traditional IRAs — they started contributing 20, 30, 40 years ago through work, and now they’re sitting on a big number that looks great on paper. But every single dollar they pull out triggers a tax event. And the ripple effects go way beyond just the tax bill itself.

The Problem Nobody Talks About Until It’s Too Late

Here’s what I see with clients who are at or near retirement with all-traditional money. They’ve done the right thing — saved consistently for decades. But now they’re stuck in a bind.

Every withdrawal is a taxable event. Need $50,000 for a new car? You might have to pull $60,000–$70,000 from your IRA to cover the taxes on the withdrawal itself. That extra income can also push more of your Social Security benefits into taxable territory and disqualify you from healthcare subsidies if you’re retiring before 65.

People delay retirement because of tax math. Some clients don’t want to retire — or don’t want to do certain things in retirement — because they know every dollar they touch creates a chain reaction. It’s a kind of golden handcuffs situation. The money is technically theirs, but spending it comes with strings they didn’t anticipate 30 years ago.

This isn’t a knock on anyone who saved in traditional accounts. For a long time, that was the default — and for many people, the only option their employer offered. Roth 401(k) options at work are still relatively new. But if you’re in your 20s or 30s right now, you have an opportunity most retirees didn’t: you can diversify your tax exposure before it becomes a problem.

A Quick Look at Where Tax Rates Have Been

The standard advice for traditional accounts has always been: “Your income will be lower in retirement, so you’ll be in a lower tax bracket.” And maybe that’s true. But it assumes tax rates stay where they are — and historically, they haven’t.

The top federal rate hit 94% during World War II. For roughly 40 to 50 years after that, it stayed between 70% and 91%. Today’s 37% top rate is historically low. Have rates gone down before? Sure — the 2017 Tax Cuts and Jobs Act brought them down a bit. But the long-term trend, especially with Social Security, Medicare, and Medicaid all significantly underfunded, points in one direction. The government is going to need revenue from somewhere, and they’ve raised rates before.

I’m not predicting the future. Nobody can. But McKnight’s argument is simple: if there is even a slight possibility that tax rates go up, you’re better off paying the tax now and locking in today’s rates.

“Whether you pay the tax now or pay it later, the end result is the same — as long as rates stay the same. The Roth just means you’re no longer guessing.”

Why the Roth Is My Favorite Bucket

I’ve always liked Roth IRAs, but the flexibility angle is what really sets them apart for younger savers. Here’s what most people don’t realize: a Roth isn’t just a retirement account. It’s one of the most versatile financial tools you can have.

Since you fund a Roth with after-tax dollars, you can withdraw your contributions — not the gains, but the money you actually put in — at any time, without tax and without penalty. No age requirement. No waiting period. That means if something drastic happens at 32, you’re not stuck choosing between a 10% early withdrawal penalty plus income tax (the traditional IRA path) and going into debt. Your contributions are accessible.

That makes a Roth three things at once: a retirement vehicle, a tax diversification tool, and a backup emergency fund. I don’t know of another account that does all three.

And when you do hit retirement, the math gets even more interesting. If you’ve built up both traditional and Roth balances, you can withdraw from your IRA up to the standard deduction — around $34,700 for a married couple — and then take the rest of your income from the Roth. At that point, none of your Social Security is taxed either. It’s entirely possible to pull $100,000 a year in retirement and owe zero in federal income tax.

The Numbers That Changed How I Think About This

I ran projections for clients at three starting ages, contributing the same amount each year at a 7% average return:

• Start at 20: $1.6 million (40 years of growth)
• Start at 30: $775,000 (30 years of growth)
• Start at 40: $345,000 (20 years of growth)

Starting at 20 versus 30 is the difference between $1.6 million and $775,000 — roughly half. And waiting until 40 cuts it in half again. That’s not because the contributions are different. It’s compound interest doing what it does best when you give it time.

That said, $345,000 is still a meaningful amount. If you’re 40 and haven’t started, this isn’t meant to discourage you — it’s meant to show that every year you start earlier buys you a disproportionate amount of runway.

When a Roth Might Not Be the Right Move

I’d be doing you a disservice if I made this sound like a silver bullet. A Roth isn’t always the best fit, and there are a few things to watch for.

Budget is the biggest one. Because you’re paying tax on the money before it goes in, a Roth contribution puts less cash in your pocket right now compared to a traditional contribution. If your budget is already tight, that difference matters.

There are also income phase-outs — above certain thresholds, you can’t contribute directly to a Roth at all. There are workarounds (like a backdoor Roth conversion), but those come with their own rules. If you have existing traditional IRA balances, something called the pro-rata rule can make part of a conversion taxable even when you think it shouldn’t be. It gets technical fast.

A word of caution: Roth conversions and backdoor strategies involve rules that are easy to get wrong. Before moving money between account types, talk to a financial planner or tax professional who can run the numbers for your specific situation. The strategy is sound — the execution needs to be precise.

What I’d Actually Tell You to Do

If you’re in your 20s or 30s and you don’t have a Roth IRA, consider opening one. You don’t need to max it out. You don’t even need to put a lot in. The same thing I said in my last piece applies here: getting started matters more than the amount.

If you’re already contributing to a traditional 401(k) at work and getting the match — great, keep doing that. But layering in a Roth alongside it means you’re building two pools of money with two different tax treatments. When you get to retirement, you’ll have options. And options are what keep people from feeling stuck.

If you’re closer to retirement and you’ve got most of your money in traditional accounts, it’s not too late. Roth conversions — moving money from a traditional IRA into a Roth and paying the tax now — can be done strategically over several years to minimize the hit. But that’s a conversation to have with a planner, not a DIY project.

Either way, the core idea is the same: don’t leave 100% of your future tax bill up to whatever Congress decides to do 20 or 30 years from now. You can take some control of that today.