Withdrawing from Your 401(k) - What Will You Owe?

The IRS Takes Cut of Your 401K

The IRS taxes withdrawals from a traditional 401(k) as taxable income. A common misconception is that there are no taxes in retirement. However, Social Security benefits, investment income, and retirement accounts are all considered taxable income.

How Are 401(k) Withdrawals Taxed?

Traditional retirement accounts like IRAs and 401(k)s tax withdrawals no differently than the regular income tax for your current tax bracket. 

Roth IRAs and 401(k) retirement accounts, on the other hand, are tax-free qualified distributions. Withdrawals are free because you paid taxes on your contributions. 

Don't Make This Mistake As A Retiree With 401(K)

Retirement may seem like the perfect time to buy that new sports car, go on that European vacation, or expand your home.

However, think again: a large 401(k) withdrawal can result in a substantial tax bill.

Making Mandatory Withdrawals at 73+

Another rule to note for retirees is the Required Minimum Distribution (RMD) for taxpayers over the age of 73. 

The minimum withdrawal amount is calculated by dividing the retirement account's balance from last year by the life expectancy factor set by the IRS.

How to Manage Your 401(K) During Retirement

• Consider a Roth conversion in low-income years
• Stagger withdrawals across multiple years
• Minimize large withdrawals to prevent jumping tax brackets
• Consult a tax advisor to budget for retirement and estimate your minimum withdrawal amount

Conclusion 

Schedule a meeting today with a team member, and we’ll help you budget, plan, and minimize your tax fee in retirement.  Contact Ovation Tax Group today and take the first step toward financial freedom.

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