The Second Bill: The Tax Bill High Earners Often Don't Plan For

The Short AnswerThe Second Bill is the income tax that comes due when money leaves a pension, cash balance plan, traditional 401(k) or IRA. The deduction you took on the way in postponed that tax to a later year. How large the bill turns out to be depends mostly on when the money comes out, who takes it out and what else they earn that year, which is why it rewards planning long before the first withdrawal.

Two Bills On The Same Dollar

The first bill is the one everyone knows: income tax on what you earn, paid as you earn it. High earners fight it every year with deductions, and one of the biggest is putting money into a pre-tax plan such as a 401(k), a pension or a cash balance plan.

The second bill arrives later. Every dollar that went into those plans without being taxed is taxed when it comes out. The IRS treats the taxable part of a pension or retirement plan distribution as ordinary income, taxed at the same rates as a paycheck, and it does not get the lower capital-gains rates that apply to many investments.

That is the Second Bill. It sits quietly on the balance sheet of nearly every successful business owner, physician and executive, and it grows with the account.

Why The Deduction Creates The Bill

A pre-tax contribution is a trade. You take a deduction today, at today’s rate, and agree to pay tax on the contribution and all its growth later, at whatever rate applies then.

The trade works well when the later rate is lower. It works less well when the balance grows large enough that the withdrawals, stacked on Social Security, investment income and any business income, keep you in a high bracket for decades. In 2026 the top federal rate of 37% begins at $768,700 of taxable income for a married couple filing jointly. A California resident also pays state tax on those withdrawals, at rates that reach 12.3%, plus a further 1% on taxable income above $1 million.

The deduction is real. So is the bill it postpones.

Same Balance, Four Different Bills

The clearest way to see the Second Bill is to hold the balance constant and change only how the money comes out.

What This Example Shows, And What It Does Not

It shows that timing is the largest lever. The account, the owner and the tax code are identical in every row. The only differences are the number of years the money is spread over and the other income sitting on top of it.

It is also a simplified illustration, and it is not a projection for anyone. Real withdrawals mix these patterns. The balance would normally keep growing, which makes every row larger. A California resident would owe state tax on top of every figure. And the heirs row assumes your heirs have no income of their own, which is rarely true for the children of high earners. Run the same inheritance through the same calculator for heirs who are a married couple already earning $400,000 a year and the federal tax on it rises to about $801,000, close to the most expensive row.

CalculatorRun your own plan balance through the four exits→

Four Forces That Set The Size Of The Bill

1. What Else You Earn In The Withdrawal Years

Withdrawals stack on top of everything else. A dollar taken out while you are still drawing a large salary is taxed at your top rate. The same dollar taken out in a year with little other income can fill lower brackets first.

2. How Many Years The Money Is Spread Over

Brackets reset every year. Spreading withdrawals across more years uses more of the lower brackets and the standard deduction, which is why, with no other income in either case, the twenty-year row in the example costs about 43% less than the heirs’ ten-year row.

3. Who Takes The Money Out, And Where They Live

Pre-tax money left to heirs is still pre-tax. Beneficiaries owe income tax on it as they withdraw it, as income in respect of a decedent. Residency matters too: federal law bars a state from taxing the retirement income of someone who is no longer a resident of that state, so where you live when the money comes out can change the state share of the bill.

4. The Rules That Choose The Timing For You

If you never decide, the rules decide. Required minimum distributions generally begin at age 73, and at 75 for people born in 1960 or later. Most non-spouse beneficiaries who inherit a retirement account must empty it by the end of the tenth year after the owner’s death. And when a business owner sells or closes the company, its retirement plan is usually terminated, which forces a decision about the balance whether or not the owner is ready.

Where Planning Can Change The Outcome

None of the following is right for everyone, and each has costs and trade-offs worth weighing with a CPA. They are the questions a plan should answer.

• Using lower-income years on purpose. The years between leaving work and claiming Social Security or reaching RMD age often carry the lowest taxable income of an adult life.
• Roth conversions. Converting part of a pre-tax balance to a Roth account means paying tax now, at a rate you can see. Qualified Roth distributions are tax-free, and Roth accounts carry no lifetime required distributions.
• Planning the plan exit before a sale. The date a plan terminates, and whether the balance is rolled over or paid out, are decisions best made before the sale agreement is signed.
• Deciding who inherits which account. Pre-tax accounts, taxable accounts and life insurance pass to heirs with very different tax results. Life insurance death benefits are generally received free of income tax, which is one reason some families use part of their tax savings to fund coverage, where health, cost and goals make it sensible.

When Professional Analysis Matters

A rough estimate is enough to see whether the Second Bill is worth your attention. It stops being enough when the balance runs to seven figures, when you sponsor a defined benefit or cash balance plan, when a sale or retirement is within five years, or when your heirs are high earners themselves. At that point the answer depends on your actual income path, your state, your plan documents and your family, and it should be modelled with your CPA before any decision is made.

In Tyler’s process, the Second Bill is one of the three numbers laid side by side at The Turn, the third meeting, alongside this year’s tax bill and your estate exposure. The game plan that follows is reviewed with your CPA and attorney before anything is filed or signed.

About The Author

Tyler Ostrovsky founded 19th Hole Financial after eight years as a professional golfer, including status on PGA Tour Canada. He builds tax strategy and advanced life insurance plans for high earners and works alongside their CPAs and attorneys.