So You Have $1 Million in Your 401(k)? Do You Really?

Picture this: you’ve spent decades faithfully contributing to your 401(k). You finally cross that milestone, seven figures. One million dollars. It feels like victory. But before you pop the champagne, let’s pause for a reality check: how much of that million is actually yours?

The answer may surprise you.

Because whether you realize it or not, you already have a partner in that 401(k). And no, it’s not your spouse. It’s the IRS.

The Silent Partner in Your 401(k)
Traditional 401(k)s are funded with pre-tax dollars. That means you got a tax break on the way in, but Uncle Sam is waiting at the other end with his hand out. Every dollar you withdraw is taxed as ordinary income. And depending on your Social Security benefits, required minimum distributions (RMDs), and other income, those withdrawals could push you into higher brackets than you expected.

In fact, someone with $1 million in a traditional 401(k) might only control $700,000 to $800,000 of it after taxes. The rest belongs, in effect, to the government.

So, do you really have a million dollars? Or do you have a joint account with your favorite involuntary business partner—the IRS?

Why This Matters
The problem isn’t just today’s tax brackets—it’s the uncertainty of tomorrow’s. The U.S. national debt is at record levels, and historically, taxes have been far higher than they are today. The question isn’t whether taxes will change, but when and how much.

That’s why many retirement planners emphasize not just growing your nest egg, but also growing it tax efficiently.

Strategies to Take Back Control
Here are a few broad strategies that people consider when trying to reduce the IRS’s slice of their retirement pie:

1. Roth Conversions
Think of a Roth IRA or Roth 401(k) as paying the cover charge up front. You pay taxes on contributions (or conversions) today, but qualified withdrawals in retirement are tax-free under current law.

That means:

• No RMDs on Roth IRAs (though Roth 401(k)s have slightly different rules).
• Tax-free withdrawals won’t increase your taxable income, which may help reduce taxes on your Social Security benefits.
• You lock in today’s tax rates, rather than gamble on tomorrow’s.
• Gradual Roth conversions, especially in lower-income years, can help shift money from “tax-forever” accounts to “tax-never” accounts.

2. Annuities
Annuities can provide something Wall Street doesn’t always offer: predictable income for life. Certain annuities can:

• Guarantee a baseline stream of retirement income you can’t outlive.
• Help manage sequence-of-returns risk (the danger of poor market performance early in retirement).
• In some cases, offer tax deferral on growth until income is taken.
• They aren’t a one-size-fits-all solution, but for many retirees, having a portion of assets in a guaranteed income stream can reduce reliance on large taxable withdrawals.

3. Permanent Life Insurance (e.g., Indexed Universal Life)
Permanent life insurance, when structured properly, isn’t just about a death benefit. It can also serve as a supplemental income tool:

• Policy loans and withdrawals can often be accessed on a tax-favored basis.
• Growth inside the policy is tax-deferred.
• Provides flexibility: income during retirement, plus a death benefit for heirs.
• It’s not a substitute for a retirement plan, but for high-income earners or those who’ve already maxed out traditional retirement accounts, it can be part of a balanced tax-diversified strategy.

The Power of Tax Diversification
David McKnight, in The Power of Zero, popularized the idea of building a “0% tax bracket” retirement. While it’s rarely possible to get there completely, the principle is solid: the more you can control when and how you’re taxed, the less of your hard-earned savings goes to your silent partner.

Having a mix of taxable, tax-deferred, and tax-free accounts gives you flexibility. It’s like having three different levers to pull in retirement, depending on what the tax code looks like at that time.

Final Thoughts
So, do you really have $1 million in your 401(k)? Maybe. Maybe not. If the IRS is holding 20–30% of it in reserve, your true balance looks very different.

The good news is, you’re not powerless. With strategies like Roth conversions, annuities, and properly structured life insurance, you can reduce the tax bite, add predictability to your income, and leave a larger legacy to your loved ones.

Retirement planning isn’t just about building a big number on a statement—it’s about making sure more of that number is yours to keep.

Disclosures: 

A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.

To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.

This material is for informational purposes only and does not constitute tax, legal, or investment advice. Please consult a qualified tax professional regarding your individual circumstance

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.