What doctors know: The surprising place they are moving 401(k) funds into

A 58-year-old radiologist built about $2.5 million in a traditional 401(k) after saving for 30 years. The person kept contributing the maximum amount, took tax deductions, and allowed the money to grow over time. Experts say the strategy worked well early on but stopped being tax-efficient once the balance crossed around $1.5 million. Many doctors do not realize this problem until required withdrawals start in retirement.

Traditional 401(k) plans promise tax savings now and lower taxes later, but that does not always happen for high earners. The radiologist earns about $450,000 per year, so the tax deduction today is large, as reported by 24/7 Wall St. However, the issue appears when Required Minimum Distributions (RMDs) begin. Because the person was born after 1960, RMDs will start at age 75. Using the Internal Revenue Service lifetime table, a $2.5 million balance creates a first withdrawal of about $101,600.

Huge forced withdrawals

This withdrawal is mandatory and cannot be skipped. That $101,600 gets added to other retirement income sources. These sources include Social Security Administration benefits, pension income, and investments. Combined income can easily cross $218,000 per year. At that level, up to 85% of Social Security benefits become taxable. Medicare premiums also rise sharply due to IRMAA surcharges.

Taxes go very high

The effective tax cost on the RMD could exceed 40% when everything is added. The hidden cost comes from federal taxes, Social Security taxes, and Medicare surcharges together. The Medicare IRMAA surcharge uses income from two years earlier. So income decisions today affect Medicare premiums in future years. For single filers earning above $205,000, monthly Medicare Part B can jump to $649.20, as noted by 24/7 Wall St. The standard premium is only $202.90 per month.

Extra Medicare costs

That means about $6,355 extra per year in premiums at one surcharge tier. When RMDs push income above limits, retirees get hit with multiple taxes at once. The effective tax rate on extra 401(k) income can cross 45%. This makes retirement withdrawals more expensive than the original tax deduction. Experts say there is still time to reduce future tax damage.

One strategy doctors use is moving money toward Roth accounts. The first tool mentioned is a backdoor Roth IRA. High earners cannot contribute directly to Roth IRAs. So they contribute to a non-deductible IRA and then convert it to Roth.

Using bonds and ETFs

The contribution limit for people age 50+ is $8,600 in 2026. Roth accounts grow tax-free and do not require RMDs. Every dollar moved to Roth reduces future mandatory withdrawals. The second option is using a brokerage account. These accounts may hold municipal bonds or index ETFs. The NYSE:MUB currently yields about 3.1%, as stated by 24/7 Wall St.

Municipal bond income is generally exempt from federal tax. For someone in a high tax bracket, that 3.1% tax-free yield equals about 5.2% taxable return. However, Medicare calculations still count municipal bond income. Even so, the tax-free yield remains competitive after taxes.

Plan early before retirement

Experts suggest calculating projected RMDs early. If projected income exceeds $205,001 single or $410,001 joint, IRMAA tier penalties apply, as cited by 24/7 Wall St. The best planning window is about 10 years before withdrawals begin. Doing a backdoor Roth conversion every year can slowly reduce risk. Roth withdrawals do not count toward IRMAA income limits. But Roth conversions themselves are taxable in the year done.

Experts also recommend speaking to a fee-only advisor. A well-timed conversion in a lower income year can cut future taxes. This strategy can reduce Medicare surcharges permanently. At balances above $2.5 million, shifting away from traditional 401(k) becomes more tax-efficient.

Redirecting savings into Roth and after-tax brokerage accounts is now a common strategy among doctors. The report also says many Americans underestimate retirement needs. Data shows one simple habit can double retirement savings, as stated by 24/7 Wall St. The habit is consistent saving over time. Experts say this approach works better than lifestyle cuts alone.

FAQs

Q1. Why are doctors moving money out of traditional 401(k) accounts?

Doctors are shifting funds to reduce high taxes and Medicare surcharges caused by large required withdrawals in retirement.

Q2. What is the benefit of using a Roth IRA instead of a traditional 401(k)?

Roth IRA money grows tax-free and does not require mandatory withdrawals, helping lower future tax bills.