Quick overview

When you take money out of a retirement account, taxes and rules change based on the account type and your situation. Traditional IRAs, 401(k)s and most employer plans generally produce taxable withdrawals taxed as ordinary income. Roth accounts can provide tax-free distributions if they meet the five-year and other qualification rules. Early withdrawals often trigger a 10% penalty unless an exception applies. These base facts shape the rest of your retirement-tax plan (IRS: Retirement Plan Withdrawals; IRS Pub 590‑B).

How withdrawals are taxed, by account type

  • Traditional IRA and pre-tax 401(k)/403(b)/pension: Withdrawals are included in taxable income and taxed at ordinary income rates. You may also owe state income tax depending on where you live.
  • Roth IRA and Roth 401(k): Qualified distributions are tax-free. To be qualified from a Roth IRA you must meet the five‑year rule and be age 59½ (or meet another qualifying event). Nonqualified Roth distributions can include a return of contributions (tax‑free) and taxable earnings.
  • After‑tax or basis‑adjusted accounts: If you have after‑tax contributions in an IRA or employer plan, withdrawals are pro‑rated between basis and earnings unless you roll basis amounts into an after‑tax Roth via specific processes.

Authoritative reading: IRS Publication 590‑B (Distributions) explains IRA distribution taxation and exceptions; the IRS retirement withdrawals page outlines plan‑specific rules (irs.gov/retirement‑plans).

Age and timing: penalties, exceptions and Required Minimum Distributions (RMDs)

  • Early‑withdrawal penalty: Generally, distributions before age 59½ are subject to ordinary income tax and a 10% early‑distribution penalty unless an exception applies (disability, some medical costs, substantially equal periodic payments (72(t)), qualified reservist distributions, etc.). See IRS Pub 590‑B for a list of exceptions.
  • Substantially Equal Periodic Payments (72(t)): This IRS method lets you take penalty‑free early distributions if you follow a strict schedule. It can be useful for early retirees but has complexity and strict rules; mistakes can cause retroactive penalties and interest.
  • Required Minimum Distributions (RMDs): Under SECURE Act 2.0, the RMD age increased to 73 starting in 2023 and will rise further to 75 in 2033. As of 2025, RMDs generally begin at age 73 for most account owners. RMDs force taxable withdrawals from pre‑tax accounts and can push you into higher tax brackets if not planned for (IRS: RMD guidance).

Reporting and tax forms

  • 1099‑R: Distributions from IRAs and employer plans are reported to you and the IRS on Form 1099‑R. Keep good records of basis, rollovers, and conversions.
  • Form 8606: Use for nondeductible IRA contributions and to track basis (if applicable).
  • State returns: Many states tax retirement income differently — some exempt a portion of retirement income, others tax it fully. Check your state tax agency guidance.

Common tax traps I see in practice

  • Lump‑sum withdrawals that spike taxable income. Large single‑year distributions can push retirees into higher federal tax brackets, increase Medicare Part B/D premiums (IRMAA), and reduce eligibility for tax credits.
  • Ignoring basis and Form 8606. Failing to track nondeductible IRA basis causes unnecessary tax on conversion or distribution.
  • Misusing 72(t) or stopping SEPPs prematurely. The IRS treats missteps as missed penalties with interest.
  • Neglecting state tax and local surtaxes. Always run a state‑level projection.

Strategies to reduce taxes on withdrawals

Use combinations of these strategies — they work best when coordinated with a tax adviser:

  • Stagger withdrawals to control taxable income: Take smaller distributions across multiple years to remain in a lower bracket. This is particularly effective around thresholds for Social Security taxation and Medicare IRMAA.
  • Roth conversions in lower‑income years: Convert traditional IRA/401(k) assets to Roth accounts when your taxable income is relatively low to lock in taxes now and make future withdrawals tax‑free. Watch the interplay with capital gains, Social Security taxation, and Medicare IRMAA. See our guide on Roth conversions for timing and tax efficiency.
  • Qualified Charitable Distributions (QCDs): If you are age 70½ or older, you can make QCDs from an IRA directly to qualified charities. QCDs count toward an RMD and exclude the amount from taxable income (IRS Pub 590‑B covers QCD rules). QCD minimum age and rules should be confirmed with current IRS guidance.
  • Use tax‑loss harvesting in taxable accounts: Offset taxable withdrawals by realizing capital losses in taxable brokerage accounts to reduce overall tax liability.
  • Coordinate Social Security and withdrawals: Delay Social Security if your portfolio can support it; taxed Social Security depends on combined income which can be affected by withdrawals.
  • Consider partial Roth ladders: Move amounts each year into Roth accounts to create a stream of future tax‑free withdrawals. Conversions create taxable income in the conversion year, so plan conversions in years with lower income.

Real‑world examples (anonymized)

  • Example 1: A 60‑year‑old client withdrew $40,000 from a traditional IRA to cover living costs. The one‑time spike made a portion of their Social Security taxable and raised Medicare IRMAA surcharges. By taking $20,000 in year one and $20,000 in year two, we reduced federal tax and IRMAA exposure, saving roughly $1,600 in the example scenario.
  • Example 2: An early retiree used a 72(t) SEPP schedule from a pre‑tax account to fund living expenses until age 59½, avoiding the 10% penalty. They worked closely with a CPA to set the payment schedule and documented assumptions to reduce audit risk.

Who should worry most and when to act

  • Early retirees under 59½ who plan to tap retirement accounts need penalty and exception planning (72(t), Roth ladder, bridge assets).
  • Those approaching the RMD age should model RMDs and consider Roth conversions earlier when they can control taxable brackets.
  • High‑income retirees or those with variable income should model how withdrawals affect Medicare premiums, tax brackets, and capital gains tax thresholds.

Interaction with Medicare and other benefits

Higher taxable income from withdrawals can increase Medicare Part B/D premiums through IRMAA and affect eligibility for need‑based programs and subsidies. Check Medicare.gov for IRMAA rules. I regularly run projections for clients to avoid surprise premium surcharges.

State tax considerations

States vary: some fully tax traditional retirement income, some exempt all or part of pension/IRA income, and a few have no income tax. Always run state projections and consult your state tax agency.

Practical withdrawal sequence (a common framework)

  1. Taxable account withdrawals (capital gains treatment where applicable).
  2. Tax‑deferred account withdrawals (traditional IRA/401(k)).
  3. Tax‑free withdrawals (Roth) — generally last to preserve tax diversification, unless required for a Roth conversion strategy.
    This sequence is a guideline — your situation, tax rates, and estate plans will change the optimal order.

Frequently asked questions (short answers)

  • Will my withdrawals be taxed at a special retirement rate? No. Withdrawals from tax‑deferred accounts are taxed as ordinary income, at the same federal rates as other ordinary income.
  • Can I avoid the 10% penalty if I retire early? Possibly — options include 72(t) SEPP, separation from service after age 55 for employer plans, disability, or other IRS exceptions. See IRS Pub 590‑B for exceptions.
  • Do RMDs still apply? Yes. As of 2025, RMDs generally begin at age 73 for most retirement account owners (per SECURE Act 2.0 and IRS guidance).

Recommended next steps (practical checklist)

  • Run a multi‑year tax‑sensitive withdrawal projection with a financial planner or CPA.
  • Review and document basis (Form 8606) for nondeductible IRAs.
  • Test Roth conversion scenarios in low‑income years and before large RMD years.
  • Consider QCDs if charity is part of your plan and you meet age requirements.

Internal resources

Authoritative sources

Professional disclaimer

This article is educational and not individualized tax or legal advice. Tax laws change and individual circumstances vary. Consult a qualified CPA or financial planner before implementing withdrawal, conversion, or distribution strategies.

Author note

In my 15+ years advising retirees, I’ve seen small changes in withdrawal timing save thousands in taxes and protect Medicare benefits. Early planning and coordination with a tax professional are the highest‑value actions retirees can take.