How much tax do you pay to get money out of a 401(k) or pre-tax retirement account? It depends on several factors. Most importantly, you want to be aware of:
✔️ Income taxes
✔️ Penalty taxes for early withdrawals
✔️ Tax withholding

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The amount of income tax you pay on 401(k) withdrawals depends on everything happening on your return. For example, income from work, investments, Social Security, and other sources can raise your income level. That might put you into a relatively high bracket.

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At the same time, any deductions, including the standard deduction, can reduce the taxes. You might even be able to get retirement money without paying taxes in some cases.

Of course, your age is important, as penalty taxes can increase the tax bite. That’s usually only when you’re under the age of 59 ½, but there are exceptions and wrinkles to be aware of—they might help you avoid paying that tax.

More Resources:
Calculator to estimate taxes due:
Penalty tax exceptions:

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CHAPTERS:
00:00 How Much Tax Do You Pay?
00:30 Pre-Tax Withdrawals Are Ordinary Income
01:02 Income Tax
01:27 Penalty Taxes
01:48 Tax Withholding
02:29 Examples on Tax Return
05:22 Social Security Taxation
06:25 Is it a Taxable Withdrawal?
07:12 More on Taxable Income
09:00 Tax Brackets and Rates
11:35 Why Income Matters
12:08 Withholding and Penalties
15:07 Exceptions to 10% Penalty

We’ll walk through the key points and a few examples in this video. But it’s critical to review your situation with a tax expert before making any decisions, taking withdrawals, or filing a return. Your reality might be significantly different from what this video describes, so you need to triple-check everything.

Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.

IMPORTANT:
retirement account withdrawals can complicate income taxes (both federal and state), tax penalties, underpayment penalties, and more. It’s impossible to cover everything you need to know in a video like this. The only thing that’s certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration….(read more)

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How Much Tax Do You Pay on 401(k) Withdrawals?

A 401(k) is a retirement savings plan offered by employers to their employees. It allows individuals to contribute a portion of their pre-tax income, which grows tax-deferred until they withdraw the funds during retirement. While the tax advantages of a 401(k) are clear during the accumulation phase, many wonder what taxes will apply when they begin making withdrawals. To understand the tax implications, let’s explore the different factors that affect the tax on 401(k) withdrawals.

The first important consideration is the type of 401(k) plan you have. Traditional 401(k) plans allow contributions to be made with pre-tax earnings, meaning the money is not taxed when it is contributed to the account. However, when you withdraw funds from a traditional 401(k), it is treated as taxable income. This means you will have to pay income tax on the amount of the withdrawal at your ordinary income tax rate for that year.

On the other hand, there are Roth 401(k) plans that allow contributions to be made with after-tax earnings. With a Roth 401(k), you do not get an immediate tax deduction for contributions. However, when you withdraw funds from a Roth 401(k) during retirement, those withdrawals are tax-free. This can be a significant advantage for those who expect their tax rate to be higher in retirement than it is currently.

Another factor that affects the tax on 401(k) withdrawals is your age at retirement. If you withdraw funds from a traditional 401(k) before the age of 59 and a half, you will likely have to pay an additional 10% early withdrawal penalty on top of the regular income tax. This penalty is designed to discourage people from using retirement funds before reaching retirement age. However, there are exceptions to this penalty, such as using the funds for a first-time home purchase or in cases of financial hardship.

Once you reach the age of 72, you must begin taking required minimum distributions (RMDs) from your traditional 401(k) and other retirement accounts. RMDs represent the minimum amount you must withdraw each year and are subject to income tax. Failure to take RMDs can result in a hefty penalty equal to 50% of the amount that should have been withdrawn. Roth 401(k)s, on the other hand, do not have RMDs as they are not subject to taxation upon withdrawal.

It’s important to note that the tax brackets you fall into during retirement can also impact the amount of tax you will pay on your 401(k) withdrawals. If you retire with a lower income and fall into a lower tax bracket, your withdrawals may be taxed at a lower rate. However, if your retirement income is high, you may find yourself in a higher tax bracket and have to pay more taxes on your withdrawals.

In conclusion, the tax you pay on 401(k) withdrawals depends on the type of 401(k) plan you have, your age at retirement, and the tax bracket you fall into during retirement. Traditional 401(k) withdrawals are subject to income tax, while Roth 401(k) withdrawals are tax-free. Early withdrawals from traditional 401(k)s can also incur an additional 10% penalty, and RMDs must be taken from traditional 401(k)s starting at the age of 72. Understanding these factors can help you plan for the tax implications of your 401(k) withdrawals and make informed decisions about your retirement savings.