For many retirees, building a million-dollar 401k or IRA balance is the pinnacle of disciplined saving and investing. Some people even surpass this milestone, finding themselves with $2 million or more. While this level of wealth is a tremendous achievement, it also presents challenges. Without a strategy for how to use the money, a large retirement account can become more of a burden than a blessing.

At Cardinal Advisors, we meet with people every week who have sizable retirement accounts but no plan for distribution. They’ve spent decades focused on growing their accounts, yet once retirement arrives, they’re left asking: What’s the money for? How should we spend it? How can we avoid leaving behind a tax problem for our heirs?

In this blog post, we’ll walk through the realities of being a “401k millionaire,” why distribution planning matters, and what strategies can help you avoid costly mistakes.

The Hidden Risks of a Large 401k

Many people assume that accumulating a large 401k means smooth sailing in retirement. The truth is, retirement accounts come with strings attached. Every dollar in a traditional 401k or IRA is taxable when withdrawn. On top of that, the IRS eventually requires you to take money out through Required Minimum Distributions (RMDs), beginning in your 70s.

For couples who delay withdrawals, the account balance often keeps growing. While that feels good in the moment, RMDs can balloon into very large taxable withdrawals later in life. Add Social Security benefits to the mix, and suddenly retirees are pushed into higher tax brackets or facing Medicare IRMAA surcharges.

The real “gotcha” comes when one spouse passes away. The surviving spouse moves to single tax brackets, which are less favorable, but the RMDs often remain high. This “widow’s tax” can leave one spouse paying significantly more in taxes at a very difficult time.

A Real-World Case Study

We recently worked with a couple in their 60s. He had retired at age 65 with $2.5 million rolled into an IRA. They were living comfortably, withdrawing about $7,000 per month (roughly $84,000 annually). They thought this was enough, especially since they were avoiding higher taxes and IRMAA by keeping their income modest.

On paper, this looked like a great plan. But looking closer, we saw serious problems:

• No Distribution Plan: Their money was growing without a defined purpose.
• Future Tax Burden: By keeping withdrawals low, they were leaving a lot of money in the IRA to be taxed later at higher rates.
• RMD Problems: Once RMDs began, their taxable income would jump dramatically.
• Widow’s Tax Risk: After one spouse passes away, the survivor would face much higher taxes under single brackets.
• Unclear Goals: They weren’t sure if the money was for their lifestyle, long-term care, or inheritance.

We helped them see that without a proactive plan, their hard-earned money would end up being consumed by taxes and penalties rather than serving their goals.

Purpose-Driven Planning for 401k Millionaires

Money is a tool. Without a clear purpose, it becomes easy to focus only on growing the balance instead of using it wisely. Here are three key planning strategies for 401k millionaires:

1. Roth Conversions

Converting portions of your IRA to a Roth IRA allows money to grow tax-free and be passed to heirs tax-free. Done systematically, Roth conversions can smooth out your lifetime tax bill, taking advantage of today’s lower tax brackets before RMDs force higher withdrawals.

2. Income Planning

Instead of living below your means out of fear of “running out,” build a guaranteed income stream. This may involve annuities, systematic withdrawals, or a combination. The goal is to replace the paycheck you had during your working years while ensuring you never run out.

3. Estate & Tax Planning

Decide what your money is truly for. If it’s for your lifestyle, increase withdrawals and enjoy retirement. If it’s for your heirs, put strategies in place to minimize their tax burden. If long-term care is a concern, earmark funds or use IRA-based insurance solutions to cover that risk more efficiently.

The Bigger Picture: Avoiding Short-Sighted Decisions

One of the biggest mistakes we see is retirees making decisions based only on this year’s taxes. While keeping income low can feel like a win, it often creates much bigger problems in the future. A well-thought-out plan looks 10–20 years ahead and accounts for:

• When Social Security begins
• How RMDs will impact taxes
• Medicare IRMAA brackets
• The surviving spouse’s tax situation
• The eventual transfer of wealth to children or charities

By addressing these now, you can avoid surprises later.

Conclusion: Build a Plan, Not Just a Balance

Becoming a 401k millionaire is an accomplishment worth celebrating. But remember—having a large retirement account doesn’t guarantee financial freedom. Without a plan for distribution, taxes and regulations can erode your hard work.

At Cardinal Advisors, we help clients nationwide create distribution strategies that balance income needs, tax efficiency, and long-term goals. Whether you want to enjoy more of your savings today, leave a legacy, or protect yourself against future risks, the key is having a plan.