Crossing State Lines, Crossing Generations
The Three-Dimensional Case for Pre-Tax Versus Roth Decisions
The standard test for a pre-tax versus Roth decision, whether at contribution or at conversion, is a single comparison, current marginal tax bracket against the bracket expected in retirement. If it is higher now, defer. If it is lower now, do not.
That single comparison assumes a static environment. It compares one marginal bracket against another and treats everything else as fixed.
For families building a substantial, multi-generational balance, that assumption breaks down. Capital moves, families relocate across state tax regimes, and portfolios ultimately pass to heirs living in an entirely different tax reality than the one assumed at the time of contribution.
Geography and generation are not secondary considerations layered on top of the bracket comparison. Depending on the direction of a family's move and the states involved, either factor can be significant enough to flip the optimal decision in either direction.
The three axes that follow apply equally whether pre-tax dollars enter a Roth account through a new contribution or through a conversion of an existing balance. Time, geography, and generation do not distinguish between the two. A converted dollar and a contributed dollar face identical rules once they sit inside the account.
Why the Conventional Wisdom Breaks Down
A successful career combined with aggressive pre-tax contributions builds a substantial tax-deferred balance over several decades. The tax code does not allow that balance to compound indefinitely. Required Minimum Distributions (RMDs) currently begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later.
These forced distributions are taxed as ordinary income. They stack directly on top of Social Security, pensions, and taxable investment income. A seven-figure pre-tax account can generate distributions large enough to push a retiree back into a bracket comparable to the one the original deduction was meant to avoid.
This stacked income also triggers two secondary effects, both driven by the same underlying mechanism. Required distributions raise a household's Modified Adjusted Gross Income (MAGI), the measure federal law uses to test several other thresholds at once.
A higher MAGI can inflate Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount (IRMAA). It can also push MAGI over the threshold that triggers the Net Investment Income Tax (NIIT), which then applies to the household's separate investment income, not to the retirement distribution itself. Neither outcome appears on the original contribution's tax return, which is precisely why both are so often left out of the conventional deferral argument.
Regulators appear to already recognize this distortion for a subset of high earners. Beginning January 1, 2026, workers age 50 and older whose prior-year Federal Insurance Contributions Act (FICA) wages exceeded the 2026 threshold of $150,000 are required to make any employer plan catch-up contributions on a Roth, after-tax basis, rather than being allowed to choose. For 2026, the base 401(k) contribution limit is $24,500 and can still be made pre-tax, but for this group the $8,000 standard catch-up and the $11,250 super catch-up available between ages 60 and 63 must both be after-tax. These figures are indexed for inflation and adjust most years, so the dollar amounts should be confirmed for the applicable tax year, though the underlying mandate itself is a structural feature of current law rather than a figure that resets. Legislators effectively decided that unlimited pre-tax deferral was too advantageous for this income band to leave unrestricted, which is its own signal that the base contribution decision deserves the same scrutiny rather than being left on autopilot.
Relocating the Tax to the Next Generation
The distortion compounds further once a pre-tax account passes to an heir. Under the SECURE Act, the stretch IRA no longer exists for most non-spouse beneficiaries. Most heirs must now fully liquidate an inherited account within ten years of the original owner's death.
A frequently misunderstood regulatory detail accelerates this tax burden. If the original owner had already reached the required beginning date for distributions, the heir cannot simply wait and withdraw everything in the final year. Final IRS regulations mandate annual taxable distributions during years one through nine of the ten-year window. This requirement applies to distribution years beginning in 2025 and beyond.
Heirs typically inherit these accounts during their own peak-earning years, often in their forties or fifties. Forcing large, fully taxable distributions on top of an heir's established salary routinely pushes that inherited wealth into the heir's highest marginal bracket. The deduction the original owner claimed decades earlier can end up trading a smaller tax problem for a materially larger one, borne entirely by the next generation.
The Geographic Axis
Geography is often treated as a footnote to the bracket comparison, reduced to a single question about whether retirement will occur in a lower-tax state. The actual picture has at least three separate moving parts, and they do not all point in the same direction.
The geographic analysis in this article is limited to relocation between U.S. states. Crossing an international border introduces an entirely different set of considerations, including exit tax exposure, tax treaty elections, and foreign account reporting requirements, and that subject falls outside the scope of this article.
Consider an individual earning in a no-income-tax state today who plans to retire in a high-tax state. A pre-tax contribution shields no state income tax now, since the current state has none to shield against. If that balance is later withdrawn after relocating, it is taxed by the new state on the way out, a liability that never existed at the time of contribution. Deferral, in this case, manufactures a state tax bill rather than avoiding one.
Reverse the direction and the conclusion reverses with it. An individual earning in a high-tax state today who plans to retire in a no-income-tax state shields income at today's higher marginal rate at the time of contribution. If that balance is later withdrawn after the individual has established residency elsewhere, it is not taxed by any state at all. Federal law backs this outcome directly. Under the federal Pension Source Tax Act, a state is barred from taxing the retirement income of someone who is no longer its resident. Here, deferral performs exactly as the conventional wisdom assumes.
The same mechanism, evaluated in opposite directions, produces opposite conclusions. Neither direction is more typical than the other, which is why an individual's own multi-state trajectory has to be modeled explicitly rather than assumed.
A family's own retirement state is not the only geography that matters. Under the SECURE Act's ten-year rule, an inherited pre-tax balance is taxed under whichever state the heir resides in during the liquidation window, regardless of where the original owner spent retirement. A retiree who successfully avoided state income tax for decades can still leave behind a balance that is fully taxed the moment it reaches a child living in a high-tax state.
Income tax is not the only geographic lever either. A handful of states, including Massachusetts, Oregon, and Washington, impose their own state estate tax with exemptions far below the current federal figure, in some cases in the one to three million dollar range. A smaller number of states, including Pennsylvania and Nebraska, impose a separate inheritance tax tied to the heir's relationship to the decedent, regardless of where the decedent was domiciled. A family's own state at death and an heir's state of residence can each trigger this exposure independently of the income tax picture already described above.
A retiree domiciled in a no-income-tax state at death may still leave behind a pre-tax account that an out-of-state heir must liquidate over ten years, paying that heir's own state income tax on every distribution. If the heir happens to live in a state with its own inheritance tax, a second, entirely separate tax can apply to the same inherited balance, independent of how the distributions themselves are taxed.
Assume a household holds a $1.5 million pre-tax IRA at death, split equally between two heirs living in different states. An heir in a state with no income tax owes zero state tax on their share of the ten-year liquidation. An heir in a high-tax state, using an illustrative round rate of 10 percent, owes approximately $75,000 in state income tax alone on a $750,000 share. This liability occurs before any federal tax on the same distributions is calculated. Actual state top marginal rates vary and change over time, so these figures are illustrative only and depend heavily on the heir's own income, state of residence, and filing status in the years distributions are taken.
The state that ultimately matters is never fully settled. Domicile at the moment of a triggering event, whether death or divorce, is not necessarily the same state assumed during the accumulation years. Families anticipating a significant geographic move, or a change in marital status, should treat this axis as a moving target rather than a fixed input.
Death introduces one further complication briefly noted here, even though it falls outside this article's three axes. A surviving spouse typically shifts from joint to single filing status within a year or two, a change sometimes called the widow's penalty, and it can push the same household income into a materially higher bracket on top of everything already described above.
The Math: Comparing the Total Tax Drag
Evaluating this decision, at either point in the money's life, requires tracking a dollar through its entire lifecycle rather than analyzing a single tax year. The table below compares the pre-tax path against the Roth path across the stages where federal tax treatment diverges. The first row reflects a new contribution specifically, as a conversion is taxed as ordinary income upon execution. Every subsequent row applies equally to a contributed or a converted dollar. The geographic and generational axes layer on top of this table rather than inside it, since their effect depends entirely on an individual family's own trajectory.
| Stage of the Dollar's Life | Pre-Tax | Roth |
|---|---|---|
| Treatment at Contribution | Reduces current taxable income | No deduction, funded with after-tax dollars |
| Treatment at Owner's Distribution | Ordinary income, often stacked with Social Security and other required distributions | Tax-free, no required distributions during the original owner's lifetime under current law |
| IRMAA and NIIT Exposure | Increases exposure, as taxable distributions directly inflate MAGI | Shields against exposure, as qualified distributions do not inflate MAGI |
| Treatment for Heir (10-Year Window) | Subject to the ten-year liquidation window. Each distribution is taxed as ordinary income at the heir's own marginal bracket. | Subject to the ten-year liquidation window. The balance compounds tax-free throughout the decade, and distributions remain untaxed regardless of the heir's marginal bracket. |
The federal comparison alone favors whichever side has the lower long-term marginal bracket. Layering the geographic and generational axes on top of this table either confirms or completely reverses that initial conclusion.
Bringing the Three Axes Together
None of the three axes operates in isolation, and none of them is reliably dominant. The same contribution or conversion decision can look correct on one axis and incorrect on another, which is precisely why a single bracket comparison is an incomplete test.
- The Time Axis. The classic comparison still matters as a starting point. This baseline requires weighing the current marginal bracket against the expected retirement bracket, explicitly calculating the effect of required distributions stacking on Social Security, IRMAA, and NIIT.
- The Geographic Axis. An individual's own state trajectory can amplify or fully offset the time axis, depending on direction, as shown above. Layered on top of that is the heir's state during the ten-year liquidation window, and separately, whether either state imposes its own estate or inheritance tax.
- The Generational Axis. An heir's own bracket at the point of inheritance, typically during the heir's peak-earning years under the SECURE Act's compressed distribution window, can outweigh what either the time or geographic axis would suggest on its own.
The three axes ultimately combine into a single dependency, even without a precise closed-form solution for any individual family.
Evaluating both contributions and conversions through all three variables is what keeps a family from minimizing this year's tax bill while overlooking the net wealth ultimately passed across state lines and generations.
Tax diversification exists precisely because these three axes cannot always be forecast with confidence decades in advance. A portfolio holding a meaningful mix of pre-tax, Roth, and taxable brokerage assets preserves the flexibility to manage taxable income year by year, regardless of which axis ultimately turns out to matter most.
This article focuses on the pre-tax versus Roth decision within retirement accounts. Taxable brokerage assets are a third bucket that merits its own dedicated analysis, separate from that comparison. As one example, in community property states, a full basis step-up can apply to jointly held taxable assets at the death of the first spouse, a benefit that neither a pre-tax nor a Roth account receives. That structural advantage is part of why taxable brokerage assets earn a place in a diversified portfolio, and it is a topic broad enough to warrant treatment on its own rather than a full explanation here.
Optimizing a contribution or conversion strategy across time, geography, and generation is not a simple deduction versus no-deduction decision. Relying on bracket alone leaves wealth exposed to costlier state lines, a forced liquidation window, and an heir's peak-earning years. Optimization requires modeling time, geography, and generation together, years before those variables are settled.
Families holding a substantial pre-tax balance should coordinate with a dedicated tax and wealth advisory team. This ensures that the contribution or conversion choice serves comprehensive wealth transfer goals, rather than simply deferring a tax liability to a mathematically worse decade.