Retirement planning often raises the question: How many accounts do you actually need? Should you rely on just one account, or does having multiple accounts make your plan stronger? If you have multiple accounts, which one should you prioritize? The answers depend largely on individual situations, and what works well for one may not suit another.
To explore this issue, consider some data from the Federal Reserve. About 54% of U.S. households have a retirement account, while among retirees this figure rises to 73%. Yet, nearly half (47%) of retirees with investment accounts rely on just one account. This reliance on a single source raises an important question: Is one account enough for a stable retirement income?
The kinds of accounts people own affect not only their income in retirement but also how that income gets taxed. For retirees, the traditional 401(k) remains the most common investment account. Employer-sponsored plans outnumber individual retirement accounts like IRAs, which were introduced earlier but are less widespread. The Roth IRA, a newer option, only became available in the late 1990s, with Roth versions of employer plans arriving even later in 2006. This historical context means that many retirees had to rely on the accounts available during their working years.
Imagine a retired couple, Jason and Emily, both 63, seeking an annual withdrawal of $75,000 from their investments. They lack other income sources, so their withdrawals must cover their needs. How would their tax liability and spending power change based on which type of account they rely on?
If Jason and Emily had only a traditional 401(k) or similar account, they would face ordinary income taxes on every dollar withdrawn. Starting from a withdrawal of $75,000, after subtracting the standard deduction for married couples filing jointly (around $30,000 as of 2025), the taxable income stands at $45,000. With the U.S. tax system’s progressive brackets, they would pay 10% tax on the first $23,800 and 12% on the remaining $21,200, resulting in a federal tax bill of approximately $4,492. If the couple wants $75,000 in spending power post-taxes, they must withdraw around $81,000 to cover federal taxes.
State taxes present another variable. Depending on where they live, state income taxes could increase their tax burden. Furthermore, if Jason and Emily receive Social Security benefits, the taxability of those benefits adds complexity.
Alternatively, if their funds resided completely in a Roth account, Jason and Emily would enjoy tax-free withdrawals. Since contributions to Roth accounts come from after-tax income, the entire withdrawal of $75,000 remains untaxed. This simplicity allows them to withdraw exactly what they need without worrying about withholding part of it for taxes.
Still, the choice between Roth and traditional accounts depends on income patterns. If a person earns more during their working years and less during retirement, the traditional account might lead to lower overall taxes. Conversely, if income jumps in retirement or remains steady, a Roth might be more advantageous. If income stays constant between working and retired years, the tax outcome of either choice tends to balance out.
Jason and Emily might have foregone tax-advantaged accounts and invested solely through a brokerage account consisting of low-cost index funds, ETFs, or individual stocks held long term. Gains from long-term investments enjoy favorable capital gains tax rates, often much lower than ordinary income tax rates. For example, if their $75,000 withdrawal fits within the 0% capital gains tax bracket, they might owe no federal tax at all on those gains.
Yet, brokerage accounts bring their own tax complexities. Dividends, if qualified, receive favorable treatment similar to long-term gains. But not all states treat capital gains and dividends alike, and some states impose taxes that increase an investor’s overall liability. Plus, frequent trading can increase short-term capital gains, which are taxed at ordinary income rates.
Relying on a single account type could expose retirees to a range of risks. Taxes, withdrawal timing, market risks, and unexpected expenses all affect whether that strategy holds up over time. Multiple accounts offer flexibility. With both traditional and Roth accounts, retirees can manage how much taxable income they report each year. Adding taxable brokerage accounts to the mix provides access to funds without being forced to take Required Minimum Distributions (RMDs), which apply to many tax-advantaged accounts.
That said, managing multiple accounts requires discipline and careful planning. It’s easy to underestimate the tax impact or overlook state tax differences if you rely on only one account type. A diversified approach across account types can help smooth income tax burdens and provide multiple sources to draw from, reducing the chances of a shortfall.
In contrast, some retirees might prefer simplicity, focusing on a single account to avoid complexity. This approach works if their tax and income projections are stable and carefully planned.
To sum up, whether relying on a single retirement account is smart or risky depends on your personal situation. Tax treatment, income needs, and account types all intersect to influence the outcome. Having multiple accounts of different types generally offers more flexibility, but also requires more attention and strategy.
Jason and Emily’s example shows how withdrawals from different account types yield different tax consequences and influence spending power. Each option carries trade-offs in taxes and flexibility, and the right choice comes down to your unique circumstances.
Retirement planning is complex, and no single formula fits everyone. Diversifying account types is worth considering for most, but the best strategy depends on how your finances, tax brackets, and goals align. Taking a thoughtful, informed approach to your accounts can prevent surprises and build a more secure retirement.
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