The Mystery-Toll Highway: Why Maxing 401(k) Tax Deductions Today May Send You a Bigger Bill Tomorrow
Picture this.
It’s midnight and you’re racing down a brand-new expressway. Every tollbooth arm is up, the LED signs are blank, and the ride feels blissfully free. A few months later an envelope arrives: “Balance due.” There’s no itemized rate—just one demand to pay whatever number the toll authority decided after you took the trip.
That—right there—is tax deferral in a traditional 401(k).
1 | How the “mystery toll” works in your retirement account
- You speed through the booth now by deducting every pre-tax dollar you can.
- The meter keeps running while your balance compounds.
- You settle the bill later when you begin withdrawals (or when Required Minimum Distributions force them). The “toll rate” is simply whatever Congress sets for that year.
Unlike an actual highway, you can’t contest the charge or choose a different exit once you’re 70-something and living on the portfolio you built decades earlier.
2 | Why the toll is likely to rise
Today’s top marginal rate is 37 percent, thanks to the 2017 Tax Cuts and Jobs Act (TCJA). Unless Congress acts, that rate automatically snaps back to 39.6 percent—and lower brackets jump as well—on January 1, 2026.(Tax Foundation, IRS, Penn Wharton Budget Model)
| Taxable income (single filer) | 2025 bracket | Projected 2026 bracket |
|---|---|---|
| $103,351 – $197,300 | 24 % | 28 % |
| $197,301 – $250,525 | 32 % | 33 % |
| $250,526 – $626,350 | 35 % | 36 % |
| $626,351 + | 37 % | 39.6 % |
If rates merely revert to pre-TCJA levels, the mystery toll already jumps. Any new legislation aimed at shoring up deficits, Social Security, or Medicare could push it higher still.
3 | A quick math pit stop
Today:
*You earn $120,000 (24 % bracket).
*You defer $10,000 into a traditional 401(k).
*Your immediate tax “savings” = $2,400.
2035 withdrawal scenario:
*Your taxable retirement income is $110,000 (bracket now 28 %).
*Your withdrawal of the same $10,000 triggers $2,800 in tax.
*Net cost of the round trip = $400 more—and that’s before considering state taxes or surtaxes.
Inflation, bracket creep, and hefty RMDs can force even moderate-income retirees into higher brackets than they ever saw while working.
4 | Hidden fees: When the toll compels a minimum spend
Required Minimum Distributions (RMDs) begin at age 73 for most people. Each year the IRS publishes a factor that shrinks as you age, effectively raising the percentage you must withdraw—and therefore the amount subject to the unknown toll. By age 85 the RMD factor is 16.0, meaning 6.25 percent of the account must come out whether you need the cash or not.
5 | Four exits that post the price before you enter
- Roth conversions – Prepay the tax at today’s known rates, then enjoy tax-free withdrawals later.
- After-tax contributions + in-plan Roth rollovers – Some 401(k)s allow “mega-backdoor” funding.
- Properly structured Indexed Universal Life (IUL) – Build tax-advantaged cash value and receive policy loans free of income tax under current law.
- Tax-diversified buckets – Blend taxable brokerage, Roth, and permanent life insurance to control your bracket in retirement.
6 | Questions to ask yourself (or your clients)
- If the toll road could name any price after you’ve finished the trip, would you still speed through?
- How much of your current “tax savings” depends on the assumption that future legislators will keep today’s rates?
- What’s your Plan B if those assumptions are wrong?
7 | Key takeaways
- A deduction is not a discount—it’s a deferred invoice.
- Legislative sunsets (like the TCJA in 2026) make the invoice amount highly uncertain.
- Balancing pre-tax and after-tax vehicles now can lock in control later.
8 | Next steps
- Run a “future toll” projection. Model your balance under several plausible tax scenarios (24 %, 28 %, 33 %).
- Explore Roth conversion windows while brackets remain historically low.
- Compare alternatives such as maximum-funded IUL or fixed indexed annuities that provide tax-advantaged income without RMDs.
- Schedule a 15-minute strategy session (scan the QR code below) to see a side-by-side forecast of your current path versus a tax-diversified approach.
Want fewer surprises and more certainty on life’s financial highway?
Shift into a lane where the toll is posted before you drive.
(This post is for educational purposes and should not be construed as individualized tax or investment advice. Consult your tax professional.)