How Taxes Affect Retirement Withdrawals

Taxes can significantly reduce your retirement income if not planned properly. Here's what you need to know to manage your withdrawals effectively and keep more of your savings:

• Traditional Accounts (401(k)s, IRAs): Contributions are tax-deferred, but withdrawals are taxed as ordinary income. Required Minimum Distributions (RMDs) start at age 73, with penalties for missed withdrawals.
• Roth Accounts (Roth IRAs, Roth 401(k)s): Contributions are made with after-tax dollars, but qualified withdrawals are entirely tax-free. No RMDs during the account owner's lifetime.
• Social Security Impact: Withdrawals from traditional accounts can make up to 85% of your Social Security benefits taxable, while Roth withdrawals don't affect this.
• Tax Strategies: Use proportional withdrawals, Roth conversions during low-income years, and Qualified Charitable Distributions (QCDs) to lower your tax bill.
• State Taxes: Some states tax retirement income, while others don't - consider this when planning or relocating.

Quick Comparison

Feature	Traditional Accounts	Roth Accounts
Contributions	Tax-deferred	After-tax
Withdrawals	Taxed as ordinary income	Tax-free (qualified)
RMDs	Required at age 73	None during owner's lifetime
Social Security Impact	Can increase taxation	No impact

Plan early to avoid tax surprises. Use tools to track accounts, test withdrawal scenarios, and consult experts to make the most of your savings. Let’s dive deeper into strategies and details below.

Tax Rules for Different Retirement Accounts

Knowing how taxes apply to various retirement accounts is key to making informed withdrawal choices. The tax treatment you face depends on the type of account and whether contributions were made with pre-tax or after-tax dollars.

Traditional vs. Roth Accounts: Tax Differences

The main distinction between traditional and Roth accounts lies in when you pay taxes - either upfront or later in retirement.

Traditional accounts like 401(k)s and IRAs follow a "pay later" model. Contributions may be tax-deductible, lowering your taxable income now, but withdrawals in retirement are taxed as ordinary income.

On the other hand, Roth accounts require you to pay taxes on contributions upfront. However, qualified withdrawals during retirement are completely tax-free - covering both contributions and the growth they’ve earned over time.

Traditional IRAs also come with required minimum distributions (RMDs) starting at age 73 (or 72 if you turned 70½ before January 1, 2023). Roth IRAs, however, have no RMDs during the original owner’s lifetime, offering greater flexibility in managing taxes.

Here’s a quick comparison:

Feature	Traditional Accounts	Roth Accounts
Contributions	Tax-deductible	Not tax-deductible
Withdrawals	Taxed as ordinary income	Tax-free (qualified withdrawals)
RMDs	Required at age 73	No RMDs during owner's lifetime
Early Withdrawal Penalty	10% penalty before age 59½	10% penalty on earnings before age 59½

One unique benefit of Roth accounts is that you can withdraw your contributions anytime without penalties or taxes, even before age 59½. Only the earnings portion is subject to penalties if withdrawn early.

Next, let’s delve into how pre-tax and after-tax contributions affect your tax obligations.

Pre-Tax vs. After-Tax Contributions

The way you fund your retirement account - whether with pre-tax or after-tax dollars - directly influences how withdrawals are taxed. This distinction matters even more if your account contains a mix of both types of contributions.

• Pre-tax contributions are made before taxes are deducted from your paycheck. For 2025, you can contribute up to $23,500 to employer-sponsored plans like 401(k)s, with an additional $7,500 catch-up contribution if you’re 50 or older. For IRAs, the limit is $7,000, or $8,000 if you’re 50 or older. These contributions reduce your taxable income now, but withdrawals will be taxed at your ordinary income tax rate in retirement.

• After-tax contributions are made with money that’s already been taxed. For Roth accounts, qualified withdrawals are entirely tax-free. However, Roth IRA contributions are limited to individuals earning less than $150,000 (single filers) or $236,000 (married filing jointly).

Choosing between pre-tax and after-tax contributions often depends on your expected tax situation in retirement. If you anticipate being in a higher tax bracket later, after-tax Roth contributions can help you avoid higher taxes on withdrawals. Conversely, if you expect a lower tax bracket, pre-tax contributions allow you to defer taxes until they’re lower.

For those uncertain about their future tax situation, financial experts often suggest contributing to both pre-tax and after-tax accounts to diversify your tax exposure.

Now, let’s look at how these contributions impact the growth of your investments.

Tax-Deferred Growth vs. Tax-Free Growth

The way your investments grow within different account types has a big impact on your tax bill in retirement. Understanding these growth patterns can help you decide which accounts to prioritize for withdrawals.

• Tax-deferred growth applies to traditional accounts. Investments grow without being taxed during the accumulation phase, allowing your money to compound uninterrupted. However, as Mack Courter, CFP and founder of Courter Financial, explains:

  "I like to describe a tax-deferred account as really being tax-delayed. Taxes will be paid someday down the road."

  When you withdraw from these accounts, both your original contributions and the growth are taxed at your ordinary income rate.

• Tax-free growth is a hallmark of Roth accounts. While you don’t receive an immediate tax deduction, your investments grow entirely tax-free. Once you meet the qualifications (age 59½ and a five-year holding period), you can withdraw everything - contributions and growth - without owing taxes.

This distinction becomes increasingly important when considering future tax policies. Ali Hashemian, CEO of Kinetic Investment Management, notes:

"The conventional belief that taxes will be lower in retirement is outdated. The modern retiree spends more money and generates more income than previous generations did. Also, the tax environment may be worse for retirees in the future than it is today. These are just some of the reasons that tax-exempt strategies may be advantageous."

Over time, the benefits of tax-free growth in a Roth account can be substantial. For example, a Roth account that grows for 30 years could save you thousands in taxes compared to a traditional account, particularly if tax rates rise or if you find yourself in a higher bracket than expected. This understanding plays a key role in determining the order in which you withdraw funds to minimize taxes.

With these basics covered, the next step is calculating the exact tax impact of your withdrawals, which we’ll explore in the following section.

How to Calculate Taxes on Withdrawals

Understanding how withdrawals affect your taxes is key to managing your retirement income effectively. Taxes on withdrawals vary based on your total income, filing status, and state of residence. Here's a breakdown of what you need to know.

Federal Income Tax Brackets and Rates

When it comes to federal taxes, only withdrawals from traditional retirement accounts are treated as taxable income. The U.S. federal tax system uses a progressive structure, which means the more you earn, the higher your tax rate on the additional income. Here’s a look at the federal tax brackets for 2025:

2025 Tax Rate	Single	Married Filing Jointly	Head of Household	Married Filing Separately
10%	$0 to $11,925	$0 to $23,850	$0 to $17,000	$0 to $11,925
12%	$11,926 to $48,475	$23,851 to $96,950	$17,001 to $64,850	$11,926 to $48,475
22%	$48,476 to $103,350	$96,951 to $206,700	$64,851 to $103,350	$48,476 to $103,350
24%	$103,351 to $197,300	$206,701 to $394,600	$103,351 to $197,300	$103,351 to $197,300
32%	$197,301 to $250,525	$394,601 to $501,050	$197,301 to $250,500	$197,301 to $250,525
35%	$250,526 to $626,350	$501,051 to $751,600	$250,501 to $626,350	$250,526 to $375,800
37%	$626,351 or more	$751,601 or more	$626,351 or more	$375,801 or more

Here’s an example: If your income is $40,000 in 2024, you fall into the 12% tax bracket. However, if you withdraw enough to push your income over $47,150, the excess will be taxed at 22%. This is why timing your withdrawals carefully can help you avoid jumping into a higher tax bracket.

Another consideration is Required Minimum Distributions (RMDs), which are mandatory after a certain age. These add to your taxable income and can push you into a higher bracket. And if you fail to take your RMDs, the IRS imposes a hefty 25% penalty on the amount you didn’t withdraw.

State Income Tax Rules

State taxes on retirement income vary widely. Some states don’t tax retirement income at all, while others may offer partial exemptions. It’s important to understand your state’s specific rules, as they can significantly affect your overall tax liability.

The form detailing your distributions (Form 1099-R) shows how much tax has been withheld, but this amount might not cover your full liability, especially if you’re in a higher bracket. Factors like the type of retirement plan, your state of residence, and whether you take lump-sum or periodic distributions all play a role.

If you’re thinking about relocating in retirement, it’s worth examining how state taxes will impact your retirement income. This could be a key factor in deciding where to live.

How Withdrawals Affect Social Security Taxes

Withdrawals from retirement accounts can also influence how much of your Social Security benefits are taxed. This is determined by your combined income, which includes your Adjusted Gross Income (AGI), nontaxable interest, and half of your Social Security benefits.

Here’s how it works:

• For single filers, if your combined income exceeds $25,000, up to 50% of your Social Security benefits become taxable. At $34,000 or more, up to 85% of your benefits may be taxed.
• For married couples filing jointly, the thresholds are $32,000 and $44,000, respectively.

Joelle Spear, a Financial Advisor at Canby Financial Advisors, explains:

"Each $100 withdrawn from an IRA is added to your taxable income."

This means traditional IRA or 401(k) withdrawals can increase your combined income, potentially triggering taxes on your Social Security benefits. On the other hand, Roth IRA distributions don’t count toward combined income, making them a useful tool for managing taxes on Social Security.

The impact can be dramatic. For instance, a couple who delayed claiming Social Security until age 70 was able to reduce the taxable portion of their benefits from 85% to 46.5% through careful withdrawal planning.

Shailendra Kumar, Director at Fidelity’s Financial Solutions, highlights the importance of this approach:

"As the only inflation-protected source of lifetime income for many people, your Social Security benefit is of great value. Understanding the favorable tax treatment of your Social Security over time is an important element in your overall financial planning and retirement security."

These examples underscore the importance of strategic planning. Every withdrawal decision impacts your taxable income, Social Security benefits, and overall financial health. Taking a tax-aware approach can help you avoid unnecessary costs and keep more of your retirement income.

Tax-Efficient Withdrawal Strategies

Now that you have a grasp on how retirement withdrawals are taxed, let’s dive into specific strategies to help you minimize taxes and maximize your after-tax income. The timing and order of your withdrawals can significantly influence your overall tax burden throughout retirement.

Best Order for Withdrawals to Lower Taxes

The general advice is to follow a sequential approach: start with taxable accounts, then move to tax-deferred accounts like traditional 401(k)s and IRAs, and save Roth accounts for last. This method allows tax-deferred assets to grow longer while using up investments that have already been taxed.

However, this traditional approach can sometimes cause a "sudden tax spike" later in retirement. Transitioning from taxable to tax-deferred withdrawals can push you into higher tax brackets, resulting in an unexpected jump in your tax bill.

An alternative strategy is proportional withdrawals, which involves taking money from each account type based on its share of your total savings. For instance, if your retirement savings are split as 40% taxable, 45% tax-deferred, and 15% Roth, you’d withdraw proportionally from each. This approach can help create a steadier tax bill over time, avoiding sharp increases and potentially increasing your lifetime after-tax income.

For retirees with sizable long-term capital gains, there’s another angle to consider. In 2024, married couples filing jointly can earn up to $94,050 and still qualify for the 0% long-term capital gains tax rate. If this applies to you, prioritizing withdrawals from taxable accounts first may help you take advantage of this favorable tax treatment.

Next, let’s look at how Roth conversions can play a role in reducing future taxes.

Using Roth Conversions to Reduce Future Taxes

Roth conversions can be a smart way to lower your future tax bills. By converting traditional IRA or 401(k) funds into a Roth account, you pay taxes on the converted amount upfront, but all future growth and withdrawals from the Roth IRA are completely tax-free.

Timing is everything when it comes to Roth conversions. Financial advisor Roger Wohlner highlights:

"A Roth conversion can be a good idea when the stock market is down."

When account values are lower, you can convert more shares for the same tax cost, allowing future growth to be tax-free. This strategy is especially effective during market downturns or in years when your income is lower than usual.

"Since the conversions are taxable, doing a conversion in a year with relatively low tax rates can be advantageous."

Consider spreading conversions across multiple years, particularly during early retirement or before required minimum distributions (RMDs) begin at age 73. This helps you stay in lower tax brackets while minimizing the immediate tax hit.

As of mid-2024, about 26% of U.S. households owned Roth IRAs, and that number is expected to grow as more people recognize their benefits. With the Tax Cuts and Jobs Act expiring at the end of 2025, potentially leading to higher tax rates, Roth conversions may become even more appealing.

A key tip: pay the taxes on conversions using non-retirement funds instead of the converted amount. This keeps your Roth account intact and maximizes its tax-free growth potential.

Beyond conversions, managing RMDs effectively can further ease your tax burden.

Managing Required Minimum Distributions (RMDs)

RMDs, which start at age 73 (or 75 for those born in 1960 or later), can have a big impact on your tax situation. The IRS calculates your RMD by dividing your account balance at the end of the previous year by a life expectancy factor.

Andrew Bachman from Fidelity emphasizes the importance of automation:

"If you automate, you could avoid the potentially costly consequences of forgetting to take your RMD."

One effective way to manage RMDs is through Qualified Charitable Distributions (QCDs). If you’re 70½ or older, you can transfer up to $108,000 in 2025 directly from your IRA to a qualified charity. For married couples filing jointly, this limit doubles to $216,000. These transfers count toward your RMD but are excluded from taxable income.

Another strategy is to use RMDs for tax withholding. Allocating a portion of your RMD to cover taxes can help you avoid underpayment penalties and reduce your tax bill come April.

If you don’t need RMDs for day-to-day expenses, consider reinvesting them in a non-qualified brokerage account. While you’ll still pay taxes on the distribution, this allows you to continue growing the funds for future use.

Combining Roth conversions with QCDs can be particularly effective. By converting traditional IRA assets to Roth accounts before RMDs start, you reduce the balance subject to future required distributions. Any converted funds - and their growth - are exempt from RMDs.

These strategies work best as part of a well-thought-out plan. Tools like Maybe Finance can help you monitor your account balances and model different withdrawal scenarios to optimize your tax outcomes across all retirement accounts.

Using Financial Tools for Tax Planning

Handling taxes across multiple retirement accounts can get tricky. Thankfully, modern financial platforms are making it easier to manage withdrawals and minimize tax burdens.

Andrew Bachman, director of financial solutions at Fidelity Investments, explains:

"Many people are seeking ways to help reduce the taxes that they will pay over the course of their retirement. Timing is critical. So how and when you choose to withdraw from various accounts - 401(k)s, Roth accounts, and other accounts - can impact your taxes in different ways."

With the right tools, you can approach these timing decisions with greater clarity and accuracy. Let’s dive into how tracking and scenario testing can improve your tax planning.

Tracking Tax Liability Across All Accounts

Having a complete view of your accounts is essential for effective tax planning. It’s common for retirees to have their savings scattered across multiple institutions - maybe a 401(k) with a previous employer, an IRA with one brokerage, and a Roth IRA with another. This fragmented setup can make it tough to see the full tax picture.

Platforms like Maybe Finance solve this issue by linking accounts from over 10,000 institutions into one easy-to-use dashboard. This consolidated view allows you to compare balances across traditional IRAs, Roth accounts, and taxable investments, helping you understand how withdrawals from each will affect your overall tax bill.

Using AI-powered insights, these tools analyze your account mix to pinpoint potential tax inefficiencies. For instance, if your portfolio leans heavily on tax-deferred accounts, the system might suggest Roth conversions during lower-income years to help reduce future tax liabilities.

For retirees with international investments or those living abroad, Maybe Finance’s multi-currency support is a game-changer. It tracks tax implications across multiple currencies and jurisdictions, making it easier to manage complex financial situations.

Testing Withdrawal Scenarios for Tax Optimization

One of the most powerful features of today’s financial tools is the ability to test different withdrawal strategies before making decisions. Instead of guessing, you can model various scenarios to see how they’ll impact your taxes over time.

For example, you might explore multiple withdrawal approaches to understand how each affects your tax brackets, Social Security taxation, and even Medicare premiums. Advanced tools can also help you time Roth conversions, showing how converting specific amounts each year can keep you from jumping into higher tax brackets.

Some platforms even account for state-specific tax rules. This is especially useful if you’re considering moving during retirement, as you can compare how different state tax rates would affect your withdrawal strategy.

Additionally, these tools can project capital gains and losses, helping you plan strategic investment sales. This can be especially beneficial for retirees who qualify for the 0% long-term capital gains rate. For 2024, married couples filing jointly can earn up to $94,050 and still take advantage of this rate. Beyond scenario modeling, automation takes tax planning to the next level.

Automated RMD and Tax Planning Features

Managing Required Minimum Distributions (RMDs) is another area where automation shines. Missing an RMD can result in hefty penalties - 25% of the amount not distributed, though this can drop to 10% if corrected within two years. Automated RMD tracking ensures you stay on top of these requirements.

Modern financial platforms calculate your RMDs based on your age and account balances, letting you customize the timing and frequency of distributions. Real-time dashboards provide updates on your total and remaining RMD amounts for the year, helping you coordinate withdrawals with other income sources to optimize your tax situation.

For retirees interested in charitable giving, these tools can also track Qualified Charitable Distributions (QCDs). QCDs allow for tax-free distributions up to annual limits, and automated systems ensure you make the most of these opportunities while staying within the rules.

Tax withholding features add another layer of convenience, letting you automatically set aside a portion of your RMD for taxes. Some platforms even integrate with tax APIs, ensuring your calculations reflect the latest tax rates. With these tools, you can feel confident your withdrawal strategy is on point.

Conclusion: Planning for Tax-Efficient Withdrawals

Navigating taxes on retirement withdrawals doesn’t have to feel overwhelming. With the right strategy, you can ease the tax burden and make your savings last longer.

Key Points for Retirement Tax Planning

The type of retirement account you use plays a big role in your withdrawal strategy. For example, traditional accounts like 401(k)s and IRAs give you tax deductions when you contribute but tax you when you withdraw. Roth accounts, on the other hand, require you to pay taxes upfront, allowing for tax-free withdrawals later. Meanwhile, taxable accounts offer flexibility and may qualify for lower capital gains tax rates.

When you withdraw is just as important as where you withdraw from. As Andrew Bachman from Fidelity Investments explains:

"Timing is critical. So how and when you choose to withdraw from various accounts - 401(k)s, Roth accounts, and other accounts - can impact your taxes in different ways."

One effective method is proportional withdrawals, where you take money from each account based on its share of your total savings. Studies show this approach can cut retirement taxes by nearly 40% compared to less deliberate methods.

It’s also crucial to consider how withdrawals impact other areas of your finances. Your retirement income doesn’t just affect federal and state taxes - it can also determine how much of your Social Security benefits are taxed or whether your Medicare premiums increase. A well-thought-out plan can help you sidestep these unexpected costs.

Another strategy to explore is Roth conversions during low-income years. By converting tax-deferred assets into Roth accounts when you’re in a lower tax bracket, you can reduce the taxes you’ll owe in the future.

Steps to Start Optimizing Your Retirement Withdrawals

Ready to put these strategies into action? Here’s how you can get started:

• Take stock of all your accounts. Many retirees have funds spread across multiple institutions, making it hard to see the full picture. Tools like Maybe Finance can consolidate accounts from thousands of institutions, helping you get a clear view of your portfolio.

• Run withdrawal simulations. Use financial tools to test different withdrawal scenarios. These tools can show how various strategies affect your tax bracket, Social Security benefits, and Medicare costs over time, helping you plan with confidence.

• Factor in state taxes. Some states don’t tax retirement income, while others impose high taxes. If you’re thinking about relocating in retirement, consider how state taxes will impact your strategy.

• Align with your broader goals. A tax-efficient plan is great, but it should also reflect your personal priorities - whether that’s leaving assets to loved ones, supporting charities, or meeting other financial goals.

• Consult the experts. If your finances are complex, working with a financial advisor or tax professional can make a big difference. They can guide you through the nuances of retirement tax planning, especially if you have multiple account types or substantial assets.

Finally, make it a habit to review your strategy regularly. Tax laws change, and so might your financial situation. Staying proactive ensures your plan remains effective, helping you minimize taxes and make the most of your wealth.

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