How to Plan for Taxes in Retirement with Your 401(k)

You’ve spent decades building your 401(k), watching your savings grow and dreaming of a comfortable retirement. But as you approach the finish line, there’s one crucial factor that can make or break your retirement income: taxes. Many retirees are surprised to learn just how much of their 401(k) withdrawals can be lost to federal and state taxes. Without a smart tax strategy, you could end up paying more than necessary, reducing the amount you have to enjoy in your golden years.

Proactive tax planning is the key to keeping more of your hard-earned savings. By understanding how withdrawals are taxed and using proven strategies to minimize your tax bill, you can stretch your 401(k) further and enjoy greater financial freedom in retirement.

How to Plan for Taxes in Retirement with 401(k)

Traditional 401(k) Taxation

Most people contribute to a traditional 401(k) with pre-tax dollars, lowering their taxable income during their working years. However, the IRS eventually wants its share. When you withdraw funds from a traditional 401(k) in retirement, every dollar is taxed as ordinary income at your current tax rate.

Another crucial rule: Required Minimum Distributions (RMDs). Starting at age 73 (as of 2025), you must begin taking annual withdrawals from your 401(k), whether you need the money or not. These RMDs are fully taxable and can push you into a higher tax bracket, especially if you have other income sources.

Roth 401(k) Taxation

Roth 401(k)s offer a different tax advantage. You contribute with after-tax dollars, so you don’t get a tax break up front. However, qualified withdrawals in retirement are completely tax-free, including all investment growth. To qualify, you must be at least 59½ and your account must be at least five years old.

This can be a powerful way to create tax-free income in retirement, especially if you expect your tax rate to rise or want to avoid RMDs (by rolling over to a Roth IRA, which has no RMDs for the original owner).

State Taxes

Don’t forget state taxes. Some states tax 401(k) withdrawals as ordinary income, while others offer partial or full exemptions for retirement income. A few states, like Florida, Texas, and Nevada, have no income tax. Where you live in retirement can have a big impact on your after-tax income.

Strategies to Minimize Taxes on 401(k) Withdrawals

Managing Withdrawal Amounts

One of the simplest ways to reduce your tax bill is to spread your 401(k) withdrawals over many years, rather than taking large lump sums. Smaller, steady withdrawals can help you stay in a lower tax bracket and avoid triggering higher Medicare premiums or extra taxes on Social Security benefits.

Coordinate your 401(k) withdrawals with other income sources. For example, you might delay Social Security to maximize those benefits while living off 401(k) withdrawals in your early retirement years, then adjust as your income picture changes.

Roth Conversions

A Roth conversion involves moving money from your traditional 401(k) or IRA into a Roth account. You’ll pay income tax on the amount converted, but future withdrawals will be tax-free. This strategy is especially effective in years when your income is lower-such as early retirement, after a job loss, or before RMDs begin.

By converting gradually over several years, you can “fill up” lower tax brackets and avoid a big tax hit in any single year. Roth conversions also reduce future RMDs, since Roth IRAs aren’t subject to RMDs for the original owner.

Taking Advantage of Deductions and Credits

Don’t overlook tax deductions and credits that can offset your retirement income:

• Medical Expense Deductions: If your medical expenses exceed 7.5% of your adjusted gross income, you may be able to deduct them.
• Charitable Giving: Qualified charitable distributions (QCDs) from IRAs can satisfy RMDs and reduce your taxable income.
• Other Credits: Depending on your situation, you may qualify for credits related to energy-efficient home improvements, elder care, or other expenses.

Relocating for Tax Purposes

If you’re flexible about where you live in retirement, consider the tax implications. Moving to a state with no income tax or generous retirement income exemptions can significantly increase your after-tax income. Just be sure to weigh other factors, like cost of living and proximity to family.

Coordinating 401(k) Withdrawals with Other Retirement Income

Social Security Timing

The age at which you claim Social Security can affect how much of your benefit is taxed. Up to 85% of your Social Security income can be taxable if your combined income (including 401(k) withdrawals) exceeds certain thresholds.

By carefully timing your withdrawals and Social Security benefits, you can minimize the portion of your Social Security that is taxed. For some retirees, it makes sense to delay Social Security and draw down 401(k) savings first, then switch strategies as RMDs and other income sources come into play.

Required Minimum Distributions (RMDs)

RMDs are a common source of tax surprises. If you forget to take your RMD, the penalty is steep: 25% of the amount you should have withdrawn (reduced to 10% if corrected quickly). Plan ahead to ensure you take the right amount each year and coordinate RMDs with other income to avoid unnecessary tax spikes.

Taxation of Other Accounts

Your retirement income may come from multiple sources: IRAs, taxable brokerage accounts, pensions, and annuities. Each is taxed differently:

• Traditional IRAs: Taxed as ordinary income, similar to a 401(k).
• Roth IRAs: Qualified withdrawals are tax-free.
• Taxable Brokerage Accounts: Only capital gains, dividends, and interest are taxed, often at lower rates than ordinary income.
• Annuities: Taxation depends on the type of annuity and how it was funded.

A smart withdrawal strategy coordinates these sources to minimize your overall tax bill.

Common Tax Mistakes to Avoid in Retirement

• Taking Large Lump-Sum Withdrawals: This can push you into a higher tax bracket and trigger higher Medicare premiums or extra Social Security taxes.
• Forgetting About State Taxes: Don’t overlook the impact of your state’s tax laws on your retirement income.
• Missing RMD Deadlines: The penalties for missing an RMD are severe. Set reminders and double-check your calculations.
• Overlooking the Impact on Medicare Premiums: Higher income from 401(k) withdrawals can increase your Medicare Part B and D premiums.

How Beem, Your AI-Powered Smart Wallet, Supports Tax-Smart Retirement Planning

Beem is more than just a budgeting app- it’s an AI-powered Smart Wallet designed to help you manage your finances holistically, including tax planning in retirement.

• Tracking Income, Withdrawals, and Tax Deadlines: Beem automatically tracks your 401(k) withdrawals, RMDs, and other income sources, giving you a clear picture of your taxable income each year.
• Optimizing Withdrawal Timing: Beem’s AI analyzes your income streams and suggests the best times to take withdrawals to minimize taxes and avoid penalties.
• Notifications and Insights: Get proactive notifications about upcoming RMDs, changes in tax brackets, or state tax updates that could affect your retirement income.
• Scenario Planning: Use Beem to model different withdrawal strategies, Roth conversions, or even the impact of moving to a different state, so you can make informed decisions.
• Holistic View: See all your retirement accounts, income sources, and tax obligations in one place, making it easier to coordinate your plan and avoid surprises.

With Beem’s smart insights and reminders, you can take the guesswork out of tax planning and focus on enjoying your retirement.

Conclusion

Taxes don’t stop when you retire, but with smart planning, you can keep more of your 401(k) savings working for you. By understanding how withdrawals are taxed, coordinating your income sources, and using strategies like Roth conversions and careful withdrawal timing, you can minimize your tax bill and maximize your retirement income.

Don’t leave your tax planning to chance. Review your strategy regularly, stay informed about tax law changes, and leverage smart tools like Beem, your AI-powered Smart Wallet, to help you navigate the complexities of retirement taxes. For any financial aid, you can check out Beem. In addition, Beem’s Everdraft™ lets you withdraw up to $1,000 instantly and with no checks. Download the app here.

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