How Much Will I Have to Pay in Taxes on My 401(k) at 70 Years Old?

by Fraser Sherman Google

    How much tax you pay on 401(k) withdrawals is partly up to you. Even after you turn 70, you only pay tax on 401(k) withdrawals, not what stays in the account. Of course, starting at 70 1/2, you must start making required minimum withdrawals each year and pay taxes on them. You can always choose to take out more than the minimum, which makes your tax bill larger.

    RMD

    Your required minimum distribution each year is based on the IRS life-expectancy tables and the size of your account. If the appropriate table shows you have 20 years to live and $200,000 in the account, you have to withdraw $10,000. You can withdraw more, but not less. Instead of withdrawing $10,000 year after year, you have to repeat the calculation every year. Your account balance changes as your investments build earnings, so the RMD shifts over time.

    Taxes

    Whatever you take out of your account is taxable income, just as a regular paycheck would be. On your 1040, you combine it with all your other taxable income. Your tax depends on how much you withdraw and how much other income you have. If you have a $200,000 account, you could legally withdraw it all the year you turn 70. The amount you pay on that will depend on your marginal tax rate.

    Too Small

    There's one situation where you do pay tax on what's in your 401(k). If you don't withdraw enough to meet the year's RMD by Dec. 31, you pay a 50 percent penalty tax on what you didn't take out. If your RMD is $20,000 and you only withdraw $15,000, that's $2,500 in extra taxes -- half of $5,000. You report the payment by filing Form 5329 along with your other income tax forms.

    Strategies

    One way to reduce the tax impact of 401(k) withdrawals at 70 1/2 is to start taking the money out sooner. You can begin withdrawals at 59 1/2. If you defer tapping other retirement investments in favor of 401(k) withdrawals, you lower the balance of your account which reduces later RMDs. If you think your RMD would otherwise push you into a higher tax bracket, regular small withdrawals in advance can avoid that.

    About the Author

    Fraser Sherman is a former reporter with the "Destin Log" newspaper and now freelances full-time. His work has been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life," and he's the author of three film reference books, including "Screen Enemies of the American Way." He specializes in finance and tech articles.

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