How Will My 401(k) Be Taxed?

By Retirement Planning Bankrate.com

Dear Tax Talk, 

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How is my money taxed when withdrawing from my traditional 401(k)? For example, let's say it's 2014, I'm single and 65, have no income stream and am not drawing Social Security. I pull money out of my 401(k) so I can live. If I pull out $50,000, will it be taxed as if my income were $50,000 (i.e., the first $9,075 taxed at 10 percent, the next $27,824 taxed at 15 percent, and so on and so forth)? Or will it be taxed differently? In short, how will my 401(k) withdrawals be taxed? Thanks. -- Mike

Dear Mike, 

You are correct that your 401(k) withdrawal will be taxed at the various tax rates listed, depending on your filing status and the taxable income shown on your tax return.

The good news for you in your particular situation is that because you are older than 59 1/2, the 10 percent additional tax penalty will not apply. You have presented a very simplistic tax situation and the answer is fairly straightforward.

Now, let's go over a few complications, such as whether there is more income generated by Social Security, interest, dividends or capital gains. With higher income that would also include the 401(k) distribution, you may lose out on some deductions or exemption amounts.

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The reason that people put money away into retirement accounts is to defer the taxes and let the money grow tax free, and also to hopefully move it from high tax-rate years to lower tax rates when they are retired.

If you plan to take out large amounts from the 401(k), you may want to consider sitting down with a professional tax preparer who can help you determine the timing of withdrawals to minimize your tax burden.

I get many questions regarding the taxability of retirement accounts and hope this information has helped you. Thanks for the great question and all the best to you.

401(k) withdrawals are taxed like ordinary income

Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
Tax rate: 10% Single filers: Up to $9,075 Married filing jointly or qualifying widow/widower: Up to $18,150 Married filing separately: Up to $9,075 Head of household: Up to $12,950
Tax rate: 15% Single filers: $9,076 to $36,900 Married filing jointly or qualifying widow/widower: $18,151 to $73,800 Married filing separately: $9,076 to $36,900 Head of household: $12,951 to $49,400
Tax rate: 25% Single filers: $36,901 to $89,350 Married filing jointly or qualifying widow/widower: $73,801 to $148,850 Married filing separately: $36,901 to $74,425 Head of household: $49,401 to $127,550
Tax rate: 28% Single filers: $89,351 to $186,350 Married filing jointly or qualifying widow/widower: $148,851 to $226,850 Married filing separately: $74,426 to $113,425 Head of household: $127,551 to $206,600
Tax rate: 33% Single filers: $186,351 to $405,100 Married filing jointly or qualifying widow/widower: $226,851 to $405,100 Married filing separately: $113,426 to $202,550 Head of household: $206,601 to $405,100
Tax rate: 35% Single filers: $405,101 to $406,750 Married filing jointly or qualifying widow/widower: $405,101 to $457,600 Married filing separately: $202,551 to $228,800 Head of household: $405,101 to $432,200
Tax rate: 39.6% Single filers: $406,751 or more Married filing jointly or qualifying widow/widower: $457,601 or more Married filing separately: $228,801 or more Head of household: $432,201 or more

 

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