How Traditional IRA and 401(k) Withdrawals Are Taxed

A lot of people are surprised by their tax bill the first year they start drawing from their retirement accounts. That surprise is understandable. You spent decades putting money away, watching it grow, and the tax piece stayed in the background the whole time. Then you make your first withdrawal and realize: this counts as income.

It does. And knowing how that works, before you start taking withdrawals, puts you in a much better position to plan around it.

Why the money is taxable

When you contributed to a traditional IRA or a traditional 401(k), you got a tax break upfront. The money you put in reduced your taxable income in the year you contributed. The government, in effect, said: defer the tax now, pay it later when you take the money out.

"Later" is now.

Every dollar you withdraw from a traditional IRA or 401(k) is added to your taxable income for that year, just like a paycheck would be. The IRS calls this ordinary income. It gets stacked on top of any other income you have — Social Security, a pension, part-time work, rental income — and taxed at whatever federal bracket that total falls into.

There is no special lower rate for retirement account withdrawals. They are taxed the same way wages are.

What the brackets actually look like

For 2025, the federal income tax brackets for a single filer start at 10% on the first $11,925 of taxable income and step up from there. A married couple filing jointly pays 10% on the first $23,850. Most people in retirement find themselves in the 12% or 22% bracket, depending on how much they're drawing and what other income they have.

The standard deduction for 2025 is $15,000 for single filers and $30,000 for married couples filing jointly. If you're 65 or older, you get an additional deduction on top of that ($1,950 for single filers, $1,550 per spouse for married couples). That means a married couple over 65 can have roughly $33,100 in income before paying any federal tax at all.

For current bracket numbers, the IRS publishes them each year atIRS.gov. Their freeTax Withholding Estimatoralso includes a straightforward breakdown.

How Social Security fits into this

Your Social Security benefit may also become partially taxable depending on your total income. Up to 85% of your Social Security can be included in your taxable income if your "combined income" — a specific IRS calculation — is high enough.

Large IRA or 401(k) withdrawals push that number up. So a withdrawal that seems modest can trigger taxes on income you weren't expecting to owe taxes on.

This isn't a reason to avoid withdrawals. It's a reason to understand the full picture when you're deciding how much to take in a given year.

Required Minimum Distributions

Starting at age 73, the IRS requires you to take a minimum amount out of your traditional IRA and 401(k) each year. These are called Required Minimum Distributions, or RMDs. The amount is calculated based on your account balance and your life expectancy, using IRS tables.

You don't get to skip them. If you don't take your RMD by the deadline, the IRS can assess a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it promptly).

The key thing to know: RMDs count as ordinary income just like any other withdrawal. For people who haven't been drawing down their accounts earlier in retirement, the forced withdrawals can push them into a higher bracket than expected.

The IRS has an RMD worksheet and life expectancy tables inPublication 590-B, which covers distributions from IRAs. Your 401(k) plan administrator is also required to provide RMD information.

Withholding — and why it matters

When you take a withdrawal, your financial institution will typically withhold 10% for federal taxes by default, unless you ask for a different amount. That 10% is a starting point, not a guarantee that you've covered what you owe.

If your withdrawals put you in the 22% bracket, withholding only 10% means you'll owe the difference when you file. A lot of people learn this the hard way in their first year of retirement.

State taxes

Most states also tax retirement account withdrawals as income, though the rules vary. A handful of states have no income tax at all. Others exempt some or all retirement income. A few tax it fully.

If you live in a state with income tax, factor that in when estimating what you'll owe. Your state's department of revenue website is the most reliable source for current rules, since they change from time to time.

The upside of tax-deferred growth

It's worth saying plainly: tax-deferred accounts are still one of the most powerful savings tools available. The fact that withdrawals are taxed doesn't cancel out decades of compound growth on money that otherwise would have been paid to the IRS year by year.

The tax you pay on withdrawals is the cost of the benefit you already received. Most people come out ahead. The goal in retirement isn't to avoid taxes entirely. It's to understand when and how much you'll owe, so you can withdraw in a way that works for your situation.

A few things worth running the numbers on

If you have a mix of account types — traditional IRA, Roth IRA, taxable brokerage — the order in which you draw from them can affect your lifetime tax bill. A tax professional or a fee-only financial planner can help model that out based on your specific balances and income.

If you haven't started taking withdrawals yet, the years between retirement and age 73 (when RMDs kick in) can be a useful window for converting some traditional IRA money to a Roth. That's a separate topic, but it's worth knowing the option exists.

The short of it: withdrawals from traditional retirement accounts are taxable income. How much you owe depends on how much you take, what other income you have, and what state you live in. The numbers are knowable. Worth understanding before the first check arrives.