Taxes on Retirement Withdrawals: 401(k), IRA, and Pension Income

In retirement, the tax rules flip. Instead of getting a deduction for putting money into retirement accounts, you pay taxes when you take money out. Understanding how each account type is taxed helps you draw down in the most tax-efficient order.

Key Takeaways

• Traditional 401(k) and IRA withdrawals are taxed as ordinary income.
• Roth withdrawals (qualified) are completely tax-free.
• The 10% early withdrawal penalty applies before age 59½, with several exceptions.
• Withdrawal order matters: drawing from the right accounts can save thousands per year.
• Required Minimum Distributions (RMDs) start at age 73 for traditional accounts.

Tax Treatment by Account Type

The HSA (Health Savings Account) stands out as the only account with a triple tax advantage — tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

Traditional 401(k) and IRA Withdrawals

Distributions from pre-tax retirement accounts are taxed as ordinary income at your marginal tax rate. The tax rate depends on your total taxable income for the year — not a fixed “401(k) tax rate.”

Example: A married couple in 2026 withdraws $70,000 from a traditional IRA. After the estimated $30,800 standard deduction for 2026, their taxable income is $39,200. Their federal tax is approximately $4,120 — an effective rate of about 5.9%.

Key rules:

• Early withdrawal penalty: Withdrawals before age 59½ incur a 10% penalty on top of income tax, with exceptions (see below).
• Required Minimum Distributions (RMDs): Starting at age 73 (under SECURE 2.0), you must withdraw a minimum amount each year from traditional accounts. See our RMD guide.
• 20% mandatory withholding: Employers withhold 20% on 401(k) distributions paid directly to you (not applicable to trustee-to-trustee rollovers).

Roth Withdrawals: The Tax-Free Advantage

Qualified distributions from Roth IRAs and Roth 401(k)s are completely tax-free. To be “qualified,” the distribution must be:

1. After age 59½ (or due to death/disability), and
2. After the 5-year holding period (starting from the year of your first Roth contribution).

Roth accounts also have no RMDs during the account owner’s lifetime (as of 2024, Roth 401(k)s are also exempt from RMDs thanks to SECURE 2.0).

This is why many advisors recommend building a “Roth bucket” before retirement through Roth conversions or backdoor Roth contributions.

Pension Income

Most pension payments are fully taxable as ordinary income at the federal level. If you made after-tax contributions to your pension, a portion of each payment is a tax-free return of your basis — your employer or plan administrator should provide this breakdown on Form 1099-R.

State tax varies: Some states (like Illinois, Mississippi, and Pennsylvania) fully exempt pension income from state income tax. Others tax it the same as wages. Check your state tax situation.

Social Security Taxation

Social Security benefits are partially taxable depending on your “provisional income” (AGI + nontaxable interest + 50% of Social Security benefits):

Filing Status	Provisional Income	% of Benefits Taxable
Single	Under $25,000	0%
Single	$25,000 – $34,000	Up to 50%
Single	Over $34,000	Up to 85%
MFJ	Under $32,000	0%
MFJ	$32,000 – $44,000	Up to 50%
MFJ	Over $44,000	Up to 85%

For more on this, including the “tax torpedo” effect, see Social Security Tax Torpedo.

Exceptions to the 10% Early Withdrawal Penalty

Withdrawals before age 59½ generally trigger a 10% penalty, but these exceptions apply:

• Rule of 55: Leave your employer at age 55+ and withdraw from that employer’s 401(k).
• 72(t) Substantially Equal Periodic Payments (SEPP): Commit to a schedule of equal withdrawals over your life expectancy.
• Medical expenses exceeding 7.5% of AGI.
• Disability (permanent and total).
• First-time home purchase (IRA only, up to $10,000).
• Birth or adoption (up to $5,000).
• Emergency withdrawals (SECURE 2.0: up to $1,000/year without penalty).
• Inherited IRA distributions follow separate rules based on the beneficiary’s relationship to the original owner.

Tax-Efficient Withdrawal Strategies

The order in which you draw from accounts can dramatically affect your total tax bill:

1. Taxable accounts first. Withdrawals benefit from lower capital gains rates and allow tax-deferred accounts to keep growing.
2. Traditional accounts next. Fill up the lower tax brackets with traditional IRA/401(k) withdrawals.
3. Roth accounts last. Let Roth accounts grow tax-free as long as possible.
4. Roth conversion bridge. In early retirement (before RMDs and Social Security), Roth conversions at low tax rates can reduce future RMDs and the Social Security tax torpedo.

For a comprehensive withdrawal planning framework, see our retirement tax planning guide.

How sharper.tax Helps

sharper.tax analyzes your retirement accounts, income sources, and tax situation to model how different withdrawal strategies affect your lifetime tax bill. We show the impact of Roth conversions, RMD planning, and withdrawal sequencing on your effective tax rate. Sophisticated tax planning used to require a high-end CPA — we make it available for free.

Related guides:

• Traditional vs Roth math — the numbers behind the Roth decision
• Tax diversification guide — building a mix of pre-tax, Roth, and taxable accounts
• Taxes on investments — how dividends, interest, and stock sales are taxed
• Estimated tax payments — avoid underpayment penalties on retirement income
• Taxes on 401(k) withdrawals — focused deep-dive on 401(k) distributions

Sources

• IRS Topic 558: Additional Tax on Early Distributions
• IRS Publication 575: Pension and Annuity Income
• IRS Publication 590-B: Distributions from IRAs
• Social Security Benefits Worksheet (IRS Publication 915)

The information above is educational and not tax advice.