Retirement Accounts — Retirement Income Taxes: How Withdrawals Are Taxed Across Account Types

Overview

Withdrawing money in retirement has three basic tax outcomes: fully taxable, tax-free, or partially taxable. Which applies depends on the account type and the timing of the withdrawal. Understanding the distinctions lets you plan withdrawals to minimize taxes, avoid penalties, and manage your taxable income in retirement.

I’m a CPA and CFP® with more than 15 years advising clients on retirement tax planning. In practice, the biggest preventable tax surprises arise when people misunderstand which portions of their balances are taxable and when required distributions begin.

Authoritative guidance from the IRS explains early-distribution penalties and RMD rules; see the IRS pages on early distributions and required minimum distributions for the latest details (IRS.gov).

How withdrawal taxation works by account type

Below are common account types and exactly how withdrawals are treated for tax purposes.

• Traditional IRA and pre-tax 401(k)/403(b)

• Contributions or employer contributions were typically made pre-tax, or deductions were claimed for contributions. That means withdrawals are taxed as ordinary income when distributed.

• Early-withdrawal penalty: Withdrawals before age 59½ may incur a 10% penalty plus ordinary income tax unless an exception applies (see IRS Topic: Tax on Early Distributions).

• Required Minimum Distributions (RMDs): Under SECURE 2.0, the RMD starting age is generally 73 for people who reached age 72 after 12/31/2022; it rises again later per law changes. RMDs force taxable withdrawals even if you don’t need the cash (IRS – RMDs).

• Roth IRA

• Contributions were made with after-tax dollars. Qualified distributions are tax-free: generally, account must meet a 5‑taxable-year holding period and the owner must be at least 59½ (or meet another exception).

• Non-qualified distributions are ordered by IRS rules: contributions come out first (tax- and penalty-free), then conversions (potentially subject to a 5-year rule), then earnings (taxable and possibly penalized).

• Roth 401(k): employer plans may offer Roth options. Withdrawals from Roth 401(k)s follow similar qualified-distribution rules but are subject to employer-plan roll/payout rules and RMDs while held in the plan (Roth IRAs do not have RMDs during the owner’s lifetime).

• SEP and SIMPLE IRAs

• These plans are generally funded with pre-tax dollars. Withdrawals are taxed as ordinary income and subject to the same early-withdrawal rules as Traditional IRAs unless plan rules provide otherwise.

• Inherited IRAs (traditional and Roth)

• The SECURE Act (2019) largely replaced the old “stretch” rules with a 10‑year distribution requirement for most non‑eligible designated beneficiaries: most beneficiaries must empty the account within 10 years of the decedent’s death (there are exceptions for spouses, disabled persons, minor children until majority, etc.). The timing of tax recognition depends on whether the inherited account was pre-tax or after-tax (Roth).

• Inherited Roth IRA distributions can be tax-free if the original account met the 5‑year rule before the owner’s death; otherwise earnings might be taxable to the beneficiary.

Taxable vs. nontaxable portions: how to tell

When you withdraw, determine whether the distribution is:

• Return of after-tax basis (not taxable),
• Taxable earnings, or
• Fully taxable pre-tax contributions and earnings.

For IRAs and most employer plans, custodians report distributions on Form 1099-R. Box 1 shows gross distribution and Box 2a shows taxable amount. Keep records of nondeductible contributions (Form 8606 for IRAs) to establish basis and avoid double taxation.

Common triggers that change tax outcomes

• Age 59½: lifts the 10% additional tax on early withdrawals for most accounts.
• RMD age: currently generally 73 for many taxpayers (per SECURE 2.0) — RMDs cause taxable distributions from pre-tax accounts even if you don’t need the cash.
• Roth five‑year rule: affects whether Roth earnings are taxable on distribution.
• Death of the account owner: inherited account rules and the 10‑year rule can accelerate tax recognition.

Examples with numbers (simple scenarios)

• Example 1: Traditional IRA withdrawal

• You withdraw $30,000 from a Traditional IRA in retirement. That $30,000 is added to your ordinary income and taxed at your marginal rate. If you are in the 22% bracket, federal income tax on the withdrawal would be about $6,600 (plus any state tax).

• Example 2: Roth IRA qualified withdrawal

• You withdraw $20,000 from a Roth IRA that meets the 5‑year rule and you are over 59½. The entire $20,000 is tax-free.

• Example 3: Inherited IRA under the 10‑year rule

• You inherit a Traditional IRA with $100,000. You choose a withdrawal schedule that spreads distributions across years, but you must fully distribute within 10 years. The distributions are taxable as ordinary income in the years you take them; planning can help smooth taxable income.

These simplified examples ignore state tax and Medicare surtaxes that may apply at higher income levels.

Practical tax-minimization strategies

• Plan withdrawals to manage tax brackets: sequence your distributions so you avoid large bracket jumps in a single year.
• Use Roth conversions strategically: convert portions of Traditional balances to Roth in low-income years to lock in currently lower tax rates. See our detailed guide on Roth conversion timing and strategy: “Roth Conversion Roadmap: When and How to Convert for Retirement” for a step-by-step framework.
• Consider partial withdrawals vs. lump sums: spreading income over several years can reduce total taxes and the impact on Medicare premiums and Social Security taxation.
• Coordinate Social Security and distributions: taking large taxable distributions in years you claim Social Security can increase the portion of benefits that becomes taxable and affect Medicare Part B/D premiums (IRMAA).
• Preserve tax records: file and keep Form 8606 if you made nondeductible IRA contributions; it prevents double taxation when you withdraw.

Rollovers and timing

• Trustee-to-trustee direct rollovers from a 401(k) to an IRA are generally tax-free when done correctly. Avoid indirect rollovers unless you understand the 60-day rule and withholding rules.
• Rolling a Roth 401(k) to a Roth IRA generally preserves tax-free treatment; consult plan rules around RMDs for Roth 401(k).

Mistakes that lead to extra taxes or penalties

• Failing to take RMDs when required, which can trigger a stiff excise tax (SECURE 2.0 reduced the RMD penalty amount but timely distribution is still required). Check current IRS guidance on RMD penalties.
• Not tracking basis in IRAs (Form 8606) for nondeductible contributions.
• Treating inherited accounts like your own — inherited IRAs have special distribution rules.
• Converting large amounts in a single year without modeling the tax impact (could push you into a higher bracket).

Quick checklist for withdrawals

• Identify the account type and whether contributions were pre- or after-tax.
• Confirm your age and whether RMDs apply.
• Check whether Roth distributions meet the 5‑year rule.
• Estimate marginal tax rate for the year and plan distribution amounts accordingly.
• Consult your custodian for 1099‑R and withdrawal coding and retain Form 8606 if applicable.

Interrelated reading

• For a comparison of Roth and Traditional tradeoffs, see our article: “Roth vs Traditional Retirement Accounts: A Practical Comparison” — this helps decide which account to draw from first.
• For conversion timing and tax-bracket management, read: “Roth Conversion Roadmap: When and How to Convert for Retirement“.

Common FAQs (short answers)

• How much tax will I owe? Depends on the account type and your marginal tax rate in the year of withdrawal.
• Can I roll a 401(k) into an IRA tax-free? Yes, a direct trustee-to-trustee rollover generally avoids tax.
• Are inherited Roth IRAs always tax-free? Not always — earnings can be taxable if the original Roth didn’t meet the 5‑year rule before the decedent’s death.

Sources and further reading

• IRS — Tax on Early Distributions (Retirement Topics): https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
• IRS — Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds
• IRS — Inherited IRAs and SECURE Act information (search IRS site for “inherited IRA 10-year rule”).
• Consumer Financial Protection Bureau — retirement planning basics and distributions.

Professional note and disclaimer

This article explains general tax rules for retirement withdrawals and is educational only. Individual tax situations vary—state taxes, filing status, Medicare rules, and special exceptions (like certain hardship exceptions, qualified disability, or qualified birth or adoption distributions) can change outcomes. Consult a qualified tax professional or financial planner for personalized advice.

(Last reviewed 2025; verify IRS links for updates.)