Find out how your 401k is taxed in retirement, how much is it and how can you minimize it!
Planning for retirement is crucial, and a key part of that plan is understanding how your hard-earned 401k savings will be taxed. Let’s explore the different 401k taxes in retirement, so you can be prepared to enjouy your golden years! Also, if you want to check out more financial tips on our website, you can click on this link!
How Are 401(k)s Taxed in Retirement?
Withholding
Generally, 401(k) distributions are subject to a mandatory 20% withholding. This withheld amount goes toward your tax bill, similar to how taxes are withheld from your paycheck when you’re employed. When you file your tax return, you’ll calculate your total tax liability and either receive a refund or owe a balance.
Estimated Taxes
If the withholding does not cover your total tax liability on your retirement distributions, you might need to make quarterly estimated tax payments for the difference.
Reporting
Your 401(k) plan will send you – and the IRS – a Form 1099-R each year, detailing your distributions. You will use this form to report taxable distributions on line 5b of your Form 1040. These distributions are included in your adjusted gross income for the year, along with other income such as dividends, capital gains, business income, rental income, and potentially a portion of your Social Security benefits.
Lump Sums and Rollovers
You might have the option to withdraw your entire 401(k) balance as a lump sum. If you intend to transfer these funds into another retirement account, like an IRA, you must follow specific rollover rules to avoid immediate taxation on the distribution.
Required Minimum Distributions
You are required to start taking minimum withdrawals from your 401(k) by April 1 of the year following either your retirement year or the year you turn 73 if you are still working. Failing to take the required minimum distributions can result in an IRS penalty of up to 25% of the amount that should have been withdrawn.
How Much Are 401k Taxes In Retirement?
The amount of tax you pay on your 401k withdrawals depends on your tax bracket in retirement, which is based on adjusted gross income and marginal tax rate. Here are the tax rates, according to IRS:
| 2023 Tax Rates | ||||
|---|---|---|---|---|
| Single | Head of Household | Married Filing Jointly | Married Filing Separately | |
| 10% | $0 – $11,000 | $0 – $15,700 | $0 – $22,000 | $0 – $11,000 |
| 12% | $11,001 – $44,725 | $15,701 – $59,850 | $22,001 – $89,450 | $11,001 – $44,725 |
| 22% | $44,726 – $95,375 | $59,851 – $95,350 | $89,451 – $190,750 | $44,726 – $95,375 |
| 24% | $95,376 – $182,100 | $95,351 – $182,100 | $190,751 – $364,200 | $95,376 – $182,100 |
| 32% | $182,101 – $231,250 | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
| 35% | $231,251 – $578,125 | $231,251 – $578,100 | $462,501 – $693,750 | $231,251 – $346,875 |
| 37% | $578,126 or more | $578,101 or more | $693,751 or more | $346,876 or more |
How to Minimize 401k Taxes In Retirement
- Contribute to a Roth 401k (if available): if your employer offers a Roth 401k, consider contributing to it, especially if you’re in a lower tax bracket now and anticipate being in a higher one in retirement;
- Delay Withdrawals: the longer you leave your money in the account, the more it can grow tax-deferred. This allows you to benefit from compounding interest and potentially minimize your overall tax liability;
- Plan Your Withdrawals Strategically: try to spread out your withdrawals throughout retirement to avoid pushing yourself into a higher tax bracket in any given year.