What Is the Tax Rate on 401k Withdrawals After 65?

Many individuals approaching retirement wonder about a specific tax rate for 401(k) withdrawals after turning 65. However, no special tax rate exists based on reaching this age. The tax implications of taking money from your 401(k) are determined by the type of account you have—either a Traditional or a Roth—and your total taxable income for the year.

The way your withdrawals are taxed depends on whether your contributions were pre-tax or post-tax. For a Traditional 401(k), your contributions lowered your taxable income during your working years, so you pay taxes on the distributions in retirement. Conversely, contributions to a Roth 401(k) are made with money that has already been taxed, allowing for tax-free withdrawals in retirement if certain conditions are met.

Federal Income Tax on 401(k) Withdrawals

Withdrawals from a Traditional 401(k) are taxed as ordinary income. This means the amount you withdraw is added to all your other sources of income for the year, such as Social Security benefits, pensions, or any part-time work. The total figure determines your federal income tax liability based on the standard tax brackets.

You do not pay a flat rate on the withdrawal itself; rather, it becomes part of your overall income calculation. For instance, if your other income places you in the 12% marginal tax bracket, a 401(k) withdrawal could push some of your income into the next bracket, which is 22%. This distinction is important, as the entire withdrawal is not taxed at the new, higher rate; it only increases your total taxable income.

The tax treatment of a Roth 401(k) is significantly different. Qualified distributions from a Roth 401(k) are entirely tax-free. For a distribution to be considered “qualified” by the IRS, two primary conditions must be met. First, you must be at least 59½ years old. Second, you must have held the Roth account for at least five years, with the clock starting on January 1 of the first year you contributed.

If you take a non-qualified distribution from a Roth 401(k), the portion of the withdrawal that comes from your own contributions is still tax-free. However, the portion attributable to investment earnings will be subject to ordinary income tax. Since you are over 65, the 10% early withdrawal penalty would not apply, but the earnings would still be added to your taxable income for the year.

State Income Tax Considerations

Beyond federal obligations, you must also consider state income taxes, which have their own rules for retirement income. State approaches to taxing 401(k) withdrawals vary widely across the country.

Some states impose no income tax at all, meaning your 401(k) withdrawals would not be subject to any state-level tax. Another group of states taxes retirement distributions as regular income, mirroring the federal treatment. A third category of states offers some form of relief for retirees, such as excluding a certain amount of retirement income from taxation or providing special tax credits.

Required Minimum Distributions (RMDs)

The Internal Revenue Service (IRS) mandates that you begin taking withdrawals from your Traditional 401(k) once you reach a certain age, whether you need the money or not. These withdrawals are known as Required Minimum Distributions, or RMDs. You must start taking RMDs by April 1 of the year after you turn 73.

The amount you are required to withdraw each year is calculated by the IRS based on your account balance at the end of the previous year and a life expectancy factor found in IRS Publication 590-B. The RMD amount is treated as ordinary income and is taxed according to your federal and state income tax rates for that year.

Failing to take your full RMD by the annual deadline results in a significant penalty. The IRS can impose a penalty of 25% of the amount that was not withdrawn on time, which is in addition to the ordinary income tax that is due on the RMD amount itself.

Managing Your Tax Liability on Withdrawals

One common method is to have taxes withheld directly from the withdrawal amount. You can request that your plan administrator withhold a certain percentage for federal income tax. This voluntary withholding can help you avoid a large tax bill when you file your annual return.

For certain types of distributions, withholding is not optional. If you take a lump-sum distribution that is eligible to be rolled over into another retirement account but choose to receive the cash directly, your plan administrator is required to withhold a mandatory 20% for federal taxes. This 20% is a prepayment of your tax liability, as your actual tax rate on the withdrawal could be higher or lower depending on your total income.

An alternative to withholding is making estimated tax payments. If you prefer not to have taxes withheld from your 401(k) distributions, or if the amount withheld is not sufficient, you can make quarterly estimated tax payments to the IRS. This method gives you more control over your cash flow but requires careful planning to avoid underpayment penalties.