A $2 Million Retirement Portfolio Can Still Leave You Very Few Tax Choices

Let's imagine two retirement portfolios side by side. Each holds $2 million. The first is almost entirely in a traditional 401(k). The other has money in traditional IRAs, a Roth IRA, and a regular brokerage account.

Now each household plans to take out an extra $100,000 in 2026. What difference could it make depending on the accounts the dollars come from?

Suppose a married couple filing jointly already has $110,000 of taxable income, all taxed at ordinary rates. If they take the full $100,000 from a traditional 401(k), that withdrawal adds $100,000 of ordinary income. Under the 2026 federal tax brackets, the additional federal income tax would be $22,000.

Now suppose they take $50,000 from a traditional IRA, $25,000 as a qualified Roth withdrawal, and $25,000 by selling investments in a brokerage account. Say they originally paid $20,000 for those investments and held them for more than a year. The IRA withdrawal adds $11,000 in federal tax. The $5,000 investment gain adds $750 under the 2026 capital gains rates. The Roth withdrawal adds none. Total additional federal tax: $11,750.

That’s $10,250 less federal tax on the same $100,000 withdrawal that year. It isn’t a claim about lifetime tax savings. Tax was paid on the Roth money earlier, and a real household’s income and other tax rules could change the result.

I call the ability to make that choice tax diversification. You probably already diversify your investments because you don’t know which ones will do best next year. You also don’t know exactly when you’ll need more cash, what your income will be that year, or what tax rules will look like in retirement.

A big balance can leave you boxed in

Traditional 401(k)s and IRAs have done a good job for many Wichita households. You may have received a tax break while contributing, plus years of growth and an employer match. I would not tell someone to give up those benefits just to fill a different kind of account.

But every dollar of previously untaxed money you withdraw is generally taxed as ordinary income. Once required minimum distributions begin, you may have to take money out even in a year when you don’t need it for spending. The IRS explains how those distributions are taxed.

It’s like using the same dull knife for every kitchen task. You can get dinner on the table. You also spend a lot of time fighting the knife.

A Roth account gives you a different option because qualified withdrawals generally come out free of federal income tax. In a brokerage account, selling $100,000 of investments does not automatically create $100,000 of taxable income. You generally owe tax on the gain, which is the difference between what you received and what you paid for the investments. How long you held them can also affect the tax rate.

That difference gives you something useful when a car dies, the house needs work, or one spouse retires before the other. You can decide where the cash comes from after looking at the tax consequences.

The timing can change the answer

The first years after you retire may look nothing like the years that follow. Your paycheck stops. A pension may not have started yet. Social Security and required withdrawals may add income after that. One year’s sensible withdrawal can be the next year’s expensive mistake.

You may also have a chance to convert some traditional account money to a Roth during a lower income year. That means paying tax on the converted amount now in exchange for different withdrawal choices later. Convert too much in one year, though, and you can raise your tax bill and possibly your future Medicare premiums. Medicare generally uses tax information from 2 years earlier to set those premiums. Medicare explains the rule here.

There’s no percentage I can tell every household to put in Roth, traditional, and brokerage accounts. Nor can I promise that spreading money among them will save you a particular amount. The answer depends on what you earn now, when you plan to retire, what you expect to spend, and what is already sitting in each account.

Here’s what I would do before admiring a $2 million balance: write down how much is in each type of account. Then ask where an unexpected $100,000 would come from. If there’s only one answer, how much would that withdrawal add to your taxable income?

*Disclaimer: This article is for educational purposes. It is not personalized advice, a recommendation, or an offer. Talk with a CFP or CPA before acting.