Yes, Traditional (tax-deferred) IRA and 401(k) balances are taxed on withdrawal, while Roth (tax-free) IRA and 401(k) balances allow tax-free qualified distributions. That said, keep in mind that Traditional IRAs, Traditional 401(k)s and Roth 401(k)s all require that minimum withdrawals, based on the account balance and the owner’s age, be taken, currently starting at 73, increasing to 75 in 2033. These required withdrawals start out fairly low, in the 3.5% - 4% range for the earliest RMD ages, but hit 9.9% by the year you turn 93. If someone had a $1MM Traditional IRA balance at 73, had a 6% annual growth rate in the account and only took RMDs, they would still have about a $1MM balance at 93, and would be required to take a 6 figure RMD, which would have the potential to bump the IRA owner into a higher bracket than they otherwise would have been in.
Another thing about RMDs is that if you are MFJ and your spouse leaves you their tax-deferred accounts when they die, you are now required to take RMDs on the total of your (previously joint) tax-deferred balances, but you will be taxed at higher Single rates, which has the potential to at least double the taxes paid on the same withdrawal amount that you had been taking jointly.
And when tax-deferred accounts are eventually inherited by someone other than a spouse, the beneficiary only has 10 years to completely distribute the account balance. So if they, in order to try to balance out their tax burden, tax 1/10 the first year, 1/9 the 2nd year, etc. they will be taking a 6 figure distribution at least in the first year on a $1MM balance, and depending on growth in the account, could continue to take 6 figure withdrawals each year for those 10 years.
So, tax-deferral is great as long as it works. But it stops working at some point, which is why those with substantial assets in tax-deferred accounts should have a plan on how to distribute those tax-deferred assets, rather than just leaving them untouched until they are forced to take them out.
Yes, it’s a first world issue. But it can be a large issue for those with large balances.