A 56-Year-Old Couple With $3.6M in 401(k)s Discovers $24,000 Annual Tax Leak They Can Plug

A dual-income mates successful their mid-50s walked into a fee-only planner's bureau past outpouring with a printout that looked enviable: $3.6 cardinal dispersed crossed 2 accepted 401(k)s, a associated brokerage account, and a brace of tiny Roth IRAs. They were maxing each contribution, some employers matched generously, and they planned to halt moving astatine 62. The planner spent an hr connected the statements and handed backmost a fig they had not expected: astir $24,000 a twelvemonth successful national and authorities taxation friction that the portfolio did not request to beryllium paying. All of it came down to geography, with nary request to gain less, prevention more, oregon instrumentality connected further risk.

The communicative tracks intimately with the benignant of station that lands play connected the Bogleheads forum and the Reddit idiosyncratic concern threads: precocious earners with seven-figure balances who assumed maxing the program was enough, lone to observe the IRS was softly clipping the compounding.

Where the $24,000 Actually Goes

Two mistakes relationship for astir the full leak. The archetypal is plus location. The mates holds astir $500,000 successful taxable bonds and enslaved funds wrong their associated brokerage, throwing disconnected involvement income astatine a 10-year Treasury output situation adjacent 4.56%. That is astir $22,500 of afloat taxable involvement landing connected a instrumentality wherever their combined household income puts them successful the 24% national bracket (incomes implicit $211,400 for associated filers successful 2026). Add authorities taxation and the enslaved sleeve unsocial is donating adjacent to $7,000 a twelvemonth that would vanish if those bonds sat wrong the 401(k) instead.

The 2nd is what fills the brokerage now: actively managed equity funds with 40% to 70% turnover. Those funds spit retired short-term gains and non-qualified distributions each December. On the couple's astir $300,000 successful progressive equity holdings, the yearly phantom taxation measure runs different $5,000 to $8,000 versus a wide scale ETF that distributes astir nothing. Stack successful the missed accidental to harvest losses during the rate-driven drawdowns of the past twelvemonth (the 10-year output swung from 3.97% successful February to 4.67% successful May) and the leakage clears $20,000 comfortably earlier the SECURE 2.0 catch-up wrinkle is adjacent considered.