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.
Tax on a 401k Withdrawal after 65 Varies
Whatever you take out of your 401k account is taxable income, just as a regular paycheck would be; when you contributed to the 401k, your contributions were pre-tax, and so you are taxed on withdrawals. On your Form 1040, you combine your 401k withdrawal income 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 of a 401k or IRA distribution tax will depend on your marginal tax rate for the tax year, as set forth below; the tax rate on a 401k at age 65 or any other age above 59 1/2 is the same as your regular income tax rate.
The Required Minimum Distribution Varies
You required minimum distributions begin generally on April 1 of the calendar year in which you either reach the age of 70 1/2 or retire, whichever is later. Your required minimum distribution each year is based on the IRS life-expectancy tables and the size of your account. You must divide the amount in your account by the number of years of life expectancy shown on the IRS tables. 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.
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.
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 (although you can withdraw earlier, you must pay an extra 10 percent tax). 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.
2018 Tax Brackets for Determining Tax on 401k Withdrawals
The tax brackets for the 2018 tax year have changed from the previous years, and so if you began your withdrawals in 2018, your marginal tax rates if you're a single individual are as follows:
- 10 percent of the first $9,525 in income
- 12 percent of all income between $9,525 and $38,700
- 22 percent of all income between $38,700 and $82,500
- 24 percent of all income between $82,500 and $157,500
- 32 percent of all income between $157,500 and $200,000
- 35 percent of all income between $200,000 and $500,000
- 37 percent on all income over $500,000
Your 401k withdrawals will simply be included with any other income and taxed at the rate for the bracket. For example, if your 401k withdrawals are your only source of income and you only withdrew $9,000 in 2018, your tax will be 10 percent, or $900. However, if you withdrew $12,000 in 2018 with no other source of income, you will be taxed 10 percent of the first $9,525, or $952.50, plus 12 percent of the remaining $2,475, which is $297. for a total tax of $1,249.50.
2017 Tax Brackets for Determining Tax on 401k Withdrawals
The tax brackets for the 2017 tax year were different, and so you'll pay a different amount of tax on withdrawals you made in 2017:
- 10 percent of the first $9,325 in income
- 15 percent of all income between $9,325 and $37,950
- 25 percent of all income between $37,950 and $91,900
- 28 percent of all income between $91,900 and $191,650
- 33 percent of all income between $191,650 and $416,700
- 35 percent of all income between $416,700 and $418,400
- 39.6 percent on all income $418,400 and above
Following the above example, the tax on a $12,000 withdrawal (if you had no other income) would be 10 percent of $9,325 ($932.50) plus 15 percent of the remaining $2,675 ($401.25) for a total of $1,333.75.
- IRS: Retirement Plans FAQs regarding Required Minimum Distributions
- Kiplinger: Withdrawal Strategies That Break the Rules
- Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- IRS: Publication 590-B (2017), Distributions from Individual Retirement Arrangements (IRAs)
- IRS: Retirement Topics - Required Minimum Distributions (RMDs)