Is a 401(k) Really Tax-Free After 60? – Avoid This Mistake + FAQs

At age 60, you can tap into your 401(k) without a 10% early withdrawal penalty, but that doesn’t mean the money is completely tax-free.

Traditional 401(k) withdrawals after 59½ are still subject to federal income tax as ordinary income. In other words, the IRS will take its cut no matter your age. The good news is that Roth 401(k) withdrawals can be tax-free after 59½, provided you’ve satisfied the 5-year rule.

In short, turning 60 lets you avoid penalties on 401(k) withdrawals, but you’ll generally still owe taxes on those withdrawals unless your account is a qualified Roth.

Let’s break down the details of federal rules and state taxes, plus scenarios, pros and cons, and common pitfalls to help you navigate 401(k) withdrawals after 60.

Federal Tax Rules for 401(k) Withdrawals After 60

Traditional 401(k) Withdrawals After Age 59½

A traditional 401(k) is funded with pre-tax contributions, meaning you did not pay tax on that income when you earned it. As a result, withdrawals from a traditional 401(k) are taxed as ordinary income, even after age 60. Reaching age 59½ (roughly the same as being “over 60”) simply means you won’t owe the extra 10% early withdrawal penalty.

In practical terms, if you take a $20,000 distribution from a traditional 401(k) at age 60, that $20,000 will be added to your taxable income for the year. You’ll pay federal income tax on it at your marginal tax rate (which depends on your total income).

There’s no special “senior” tax rate for 401(k) withdrawals – it’s taxed like salary or any other income. The key point is penalty-free does not mean tax-free for traditional accounts.

However, there are a couple of nuances. If your 401(k) contains any after-tax contributions (not to be confused with Roth contributions), that portion of a distribution would be tax-free since you already paid tax on it. But the earnings on those after-tax contributions would still be taxable.

Most people’s traditional 401(k)s are entirely pre-tax money, so generally the entire withdrawal is taxable. Also note that federal tax withholding of 20% is often automatically applied to 401(k) distributions, but your actual tax owed could be more or less depending on your tax bracket.

Roth 401(k) Withdrawals After Age 59½

Roth 401(k)s work differently. Contributions to a Roth 401(k) are made with after-tax dollars, so you’ve already paid taxes on that money upfront. The big benefit comes later: qualified withdrawals from a Roth 401(k) are completely tax-free at the federal level.

“Qualified” means you meet two key conditions: you’re at least 59½ years old (which includes age 60 and beyond), and your Roth 401(k) account has been open for at least 5 years.

If those conditions are satisfied, when you take money out of your Roth 401(k) after 60, you owe no federal income tax on the withdrawal at all – both the original contributions and all the investment earnings come out tax-free.

For example, if you’re 60 and have had a Roth 401(k) since your mid-50s, you can withdraw $20,000 or more and pay $0 in federal tax on it. This is the ideal scenario that makes Roth accounts so powerful.

What if you’re over 59½ but your Roth 401(k) is relatively new (open less than 5 years)? In that case, your withdrawal is only partially tax-free. You can still withdraw your contributions tax-free (and penalty-free, since you’re over 59½), but the earnings portion of the distribution would be taxable income.

The 10% early withdrawal penalty wouldn’t apply because of your age, but you’d owe tax on the earnings because you haven’t met the 5-year rule yet. To avoid any tax on a Roth 401(k) withdrawal, make sure you satisfy that 5-year requirement by waiting if necessary.

One more nuance: Roth 401(k)s had required minimum distribution rules (RMDs) historically, but starting in 2024, those RMDs are eliminated – meaning you can leave your Roth 401(k) money in as long as you want without forced withdrawals. You always have the option to roll a Roth 401(k) into a Roth IRA, which also provides tax-free withdrawals and no RMDs for the original owner.

Why Age 60 (or 59½) Matters

You might wonder why age 59½ is the magic number. The IRS sets age 59½ as the threshold after which retirement account withdrawals are no longer considered “early.” This half-birthday rule avoids the 10% early withdrawal penalty. By the time you’re 60, you’re safely past that point, which is why many people casually say “after 60” when discussing penalty-free withdrawals.

It’s important to note that nothing uniquely special happens at exactly age 60 – the key change actually occurs at 59½. But since everyone hits 59½ at some point during their 59th year, turning 60 is an easy way to mark that you’ve crossed the line.

The bottom line is once you reach 59½, your 401(k) withdrawals are penalty-free going forward. Whether you take money out at 60, 62, or 70, there’s no 10% penalty anymore. The only thing that changes with age after that are required minimum distributions later on (and potentially your tax bracket or income sources).

So, to answer the question “Is 401(k) tax-free after 60?” in context: federally, reaching 60 means you avoid the penalty, but the tax itself is determined by the type of account (traditional vs Roth) and how much you withdraw, not simply your age. In short, 59½ is about penalties; tax-free status depends on Roth vs. traditional and meeting certain conditions.

Required Minimum Distributions (RMDs) in Your 70s

Another federal rule to keep on your radar as you age past 60 is the Required Minimum Distribution (RMD). RMDs are minimum amounts the IRS forces you to withdraw from most retirement accounts each year once you reach a certain age.

For traditional 401(k)s, recent law changes have shifted this age: if you were born in 1951 or later, you must start taking RMDs at age 73 (previously 72, and it will eventually rise to 75 for younger folks). If you turned 72 before 2023, you follow the old rule (starting RMDs at 72).

RMDs mean that by the time you hit your early 70s, you cannot keep money in your traditional 401(k) indefinitely to avoid taxes. You’ll be required to take out a calculated minimum amount each year, and those RMD withdrawals are taxed as ordinary income.

This is important for planning: even if you don’t need the money at 73, you’ll have to take it and pay taxes on it. Failure to take an RMD results in a steep penalty (which was 50%, now reduced to 25%, or 10% if corrected promptly under new rules). In essence, the government wants its tax revenue eventually.

Note that RMDs do not make the money tax-free; they enforce taxation by compelling you to withdraw funds. Roth 401(k)s were subject to RMDs too, but as mentioned earlier, starting in 2024 Roth 401(k) owners no longer have RMDs (aligning with Roth IRAs which never had them).

If you’re still working for the company that sponsors your 401(k) at 73, many plans allow you to delay RMDs from that particular 401(k) until you retire (this “still working” exception does not apply to IRAs). So, while age 60 itself isn’t a special tax milestone beyond avoiding penalties, ages 73+ certainly are due to RMD obligations for traditional accounts.

Special Case: The Rule of 55

Although our focus is on what happens after 60, it’s worth briefly mentioning the Rule of 55 as a federal exception that can affect 401(k) taxes and penalties for those who retire earlier.

The Rule of 55 allows you to withdraw from your 401(k) penalty-free as early as age 55 if you separate from your employer in or after the year you turn 55. In plain terms, if you retire or lose your job at 55, 56, 57, etc., you can access that employer’s 401(k) funds without the 10% early withdrawal penalty (you still pay taxes on a traditional 401(k) withdrawal, of course).

This rule is relevant because some people think they must wait until 59½. If you’re 58 and retired, for example, you actually can take distributions from the 401(k) of your last employer (assuming you left them at 58) without penalty thanks to the Rule of 55.

However, if you roll that 401(k) into an IRA, you lose the special age 55 penalty exemption – IRAs generally require 59½ for penalty-free access (aside from other specific exceptions). So, one thing to avoid is rolling over your 401(k) immediately after leaving a job in your late 50s if you will need the funds; you might be better off leaving it in the 401(k) to use the Rule of 55 exception.

Remember, this affects penalties, not the income tax: any traditional 401(k) withdrawal under this rule is still taxable, just not penalized.

In-Service Withdrawals: Accessing 401(k) Money While Still Working

If you’ve hit 60 but are still working at the company that holds your 401(k), can you withdraw your money?

The answer depends on your plan’s rules. Many employer 401(k) plans allow in-service withdrawals or rollovers once you reach age 59½, even if you haven’t retired. This means at 60, you could potentially take a distribution or transfer funds to an IRA while still employed.

From a tax perspective, these withdrawals at 60 would be treated the same (taxable for traditional, tax-free for qualified Roth) and no penalty would apply. The main difference is simply whether your plan permits it. Some plans might restrict in-service distributions of employer contributions or certain matching funds until you actually leave the company.

It’s important to check your specific 401(k) plan’s rules. If allowed, an in-service withdrawal at 60 can give you flexibility – for example, rolling money into an IRA to access a wider range of investments or consolidating accounts.

But be cautious: if you’re still earning a salary, any 401(k) withdrawal adds on top of your current income and could bump you into a higher tax bracket. Also, consider whether you really need to tap the funds while still working or if it’s better to let them continue growing tax-deferred.

In-service access is an option, not an obligation. And if your plan doesn’t allow it, you generally must wait until you leave the employer to roll over or withdraw your 401(k) funds (aside from hardship withdrawals or loans, which have their own rules and aren’t “tax-free” either – loans are not taxed when taken but must be paid back).

Federal Tax Scenarios Summary

Below is a quick reference table of common 401(k) withdrawal scenarios at different ages and whether they incur the 10% early withdrawal penalty, are taxable, or truly tax-free:

State Tax Treatment of 401(k) Withdrawals After 60

Federal taxes are only part of the story. You also need to consider state income taxes on your 401(k) distributions. State tax laws vary widely: some states fully tax 401(k) withdrawals just like the IRS, while other states offer exclusions or don’t tax retirement income at all.

The rules often depend on where you reside when you take the distribution (your state of residence generally gets to tax your income).

The good news for retirees is that a number of states are very friendly toward retirement income. Currently, nine states have no state income tax on any income, which means your 401(k) withdrawals (traditional or Roth) won’t be taxed at the state level in those places.

Other states do have an income tax but specifically exempt 401(k) or other retirement distributions from taxation, either fully or partially. On the flip side, many states will tax your 401(k) withdrawals as ordinary income, which could take another bite out of your nest egg.

Importantly, even though Roth 401(k) withdrawals are tax-free federally, if you live in a state with income tax, you should verify that the state follows the federal treatment.

Most states do (meaning if it’s not taxed federally, it’s not taxed by the state either), especially since state tax forms often start with federal adjusted gross income which excludes qualified Roth withdrawals. But it’s wise to double-check, as state-specific nuances can exist.

Below is a table summarizing how different states treat 401(k) withdrawals for retirees. This includes states with no income tax, states with full exemptions for retirement income, and examples of states with partial exemptions or credits. If a state isn’t listed in the first two categories, you can assume it generally taxes 401(k) distributions as income (though some may have minor deductions or credits not detailed here).

Always consult your state’s tax guidelines for the most accurate information, as laws do evolve.

Common Scenarios and Examples

Scenario 1: Retiring at 60 with a Traditional 401(k)

John just turned 60 and decided to retire. He has a substantial traditional 401(k) balance from decades of work. In his first year of retirement, John withdraws $30,000 from his 401(k) to help cover living expenses. Here’s what happens tax-wise:

• Federal Tax: That $30,000 is added to John’s other income for the year. If John has no other income, much of that $30,000 might fall into a lower federal tax bracket (after using the standard deduction). He’ll still owe some income tax on it – for example, after the standard deduction, a portion might be taxed at 10% and the rest at 12%.
• If John had other income (say a part-time job or rental income), the $30k could push parts of his income into higher brackets. Either way, the withdrawal isn’t tax-free; it’s taxable income.
• State Tax: John lives in California, which taxes retirement income fully. So, in addition to federal tax, he will pay California state income tax on that $30,000 (at California’s tax rates). If instead John lived in Florida (no state income tax), he’d owe no state tax on the withdrawal. Location makes a difference.
• No Penalty: Because John is over 59½, there’s no 10% early withdrawal penalty. He’s free to take out the money as needed without that extra charge.

John realizes that while he doesn’t face a penalty, the $30,000 withdrawal isn’t free money – a portion goes to taxes. If he needs more money, he could withdraw more, but he knows large withdrawals in one year could bump him into a higher tax bracket. So he plans to withdraw similar amounts each year rather than a huge lump sum, balancing his needs with tax efficiency.

Scenario 2: Retiring at 60 with a Roth 401(k)

Susan is also 60 and retiring. She invested heavily in her Roth 401(k) at her employer, which she started contributing to 10 years ago. Susan decides to withdraw $30,000 from her Roth 401(k) to fund her first year of retirement. Here’s how it plays out:

• Federal Tax: Because Susan is over 59½ and her Roth 401(k) has been open more than 5 years, her $30,000 withdrawal is a qualified distribution. She owes no federal income tax on that money. It’s completely tax-free at the federal level. This is a big win for Susan; the money comes out and none of it goes to the IRS.
• State Tax: Susan lives in a state with income tax, but her state follows the federal rules on Roth qualified withdrawals. That means her $30,000 is also tax-free at the state level (since it isn’t in her federal adjusted income to begin with). Had she lived in a state with no income tax or a state that exempts retirement income, the result would be the same – no state tax either. Essentially, Susan gets the full $30,000 with zero taxes owed.
• No Penalty: As expected, there’s no early withdrawal penalty because she’s over 59½.

This scenario highlights why Roth 401(k)s can be so valuable if you plan ahead. Susan paid taxes on her contributions years ago, and now in retirement she reaps the reward of tax-free withdrawals.

If Susan’s Roth 401(k) had been only, say, 3 years old, the outcome would differ – the earnings portion of her withdrawal would be taxable. But by meeting the 5-year rule, she avoids that.

Scenario 3: Working at 60 and Needing Funds

Mike is 61 and still working full-time. He doesn’t plan to retire for a few more years, but he wants to withdraw $10,000 from his 401(k) to pay off some high-interest debt. Here’s what Mike has to consider:

• Plan Rules: First, Mike checks whether his 401(k) plan allows an in-service withdrawal at his age. Luckily, his plan does permit employees over 59½ to take distributions. If it didn’t, he’d have to consider alternatives like a 401(k) loan or wait until retirement to access his funds.
• Taxes: Mike’s $10,000 withdrawal will be added on top of his salary. Suppose Mike earns $80,000 a year; this withdrawal makes his taxable income $90,000 for the year. It will be taxed at his marginal tax rate (so if he’s in the 22% federal bracket for that top portion, he’ll pay about $2,200 extra in federal taxes on the $10k). There’s no 10% penalty (he’s old enough), but it’s certainly not tax-free money. His state will also tax the $10k as income, since he lives in a state without special retirement exclusions.
• Impact: The extra $10,000 in income could have some side effects. Mike isn’t on Social Security yet, so no impact there. But if he were 63 or older, a higher income could affect future Medicare premiums. Mike also notes that if he waits until he retires with no salary, taking $10,000 then might be taxed at a lower rate (because his other income would be less). Still, he decides the need to pay off his debt now is worth the tax cost.

Mike’s case shows that even while working, you can often access your 401(k) after 60, but it will be taxed like any additional income. He made sure to verify his plan’s rules first. Because he’s still earning, he’ll try to keep any withdrawals small to avoid a big tax hit in a single year.

Scenario 4: Lump Sum vs. Spreading Out Withdrawals

Alice has a large 401(k) balance of $500,000 at age 60. She’s considering withdrawing the entire amount to buy property and cover some expenses. However, she compares that choice with a more gradual withdrawal approach:

• Option 1: Lump Sum: If Alice takes out the full $500,000 in one year, that entire amount becomes taxable income for the year. This would likely catapult her into the highest tax brackets. She could easily lose a big chunk (potentially over a third) of that money to federal taxes alone. For instance, portions of the withdrawal would be taxed at 24%, 32%, even 35% or 37% depending on the tax bracket thresholds.
• Plus, her state would tax the lump sum as well. The tax bill could be enormous, and withdrawing everything at once means that money stops growing tax-deferred.
• Option 2: Spread Out: Alternatively, Alice could withdraw, say, $50,000 per year over ten years. Each $50,000 adds to her income for that year, but likely keeps her in a much lower tax bracket annually (perhaps the 12% or 22% bracket, depending on other income).
• Over the decade, even though she’d pay taxes each year on $50k, the rate is significantly lower than what a one-time $500k withdrawal would trigger.
• Meanwhile, the funds remaining in the 401(k) continue to grow tax-deferred between withdrawals. She could also convert some of the 401(k) to a Roth IRA gradually, paying taxes on smaller chunks and potentially making later withdrawals tax-free.

In comparing the two options, Alice sees that the lump sum withdrawal is a tax trap – it gives her money quickly but with a very high immediate tax cost. Spreading out withdrawals is far more tax-efficient and preserves her retirement assets longer.

Unless there’s a compelling need for all the cash at once, most financial experts would advise against the lump sum in favor of phased withdrawals or partial rollovers to Roth or other accounts. Alice decides to take the measured approach, withdrawing what she needs annually rather than all at once.

Pros and Cons of Withdrawing from 401(k) at Age 60

Is it a good idea to start withdrawing from your 401(k) at 60? It depends on your situation. There are some clear advantages to having penalty-free access to your money, but there are also downsides to consider. Here’s a look at the pros and cons:

Key Terms and Concepts Explained

• 401(k): An employer-sponsored retirement savings plan that lets you contribute part of your salary. Traditional 401(k) contributions are pre-tax (tax-deductible), while Roth 401(k) contributions are after-tax (but lead to tax-free withdrawals later).
• Traditional 401(k): A 401(k) account funded with pre-tax dollars. Contributions lower your taxable income in the year you make them, but withdrawals in retirement are fully taxable as income.
• Roth 401(k): A 401(k) account funded with after-tax dollars. Contributions don’t get a tax deduction, but if you follow the rules (59½+ age and 5-year rule), withdrawals of both contributions and earnings are tax-free.
• Early Withdrawal Penalty: A 10% additional tax the IRS charges if you withdraw money from a retirement account like a 401(k) before age 59½ without a qualifying exception. This is on top of regular income tax.
• Age 59½ Rule: The IRS threshold for penalty-free retirement withdrawals. Once you are 59½ (or older), you can take money from IRAs or 401(k)s without the 10% early withdrawal penalty (taxes still apply to taxable distributions).
• Rule of 55: A provision that lets you withdraw from your 401(k) without penalty if you leave your job in or after the year you turn 55. It only applies to the 401(k) of the employer you left at 55+, and it doesn’t apply to IRAs.
• Required Minimum Distribution (RMD): Mandated withdrawals that must start from retirement accounts at a certain age. For traditional 401(k)s, RMDs typically begin at age 73 under current law (if you hit 72 after 2022). Each year, the IRS requires you to take out a minimum amount (calculated based on your account balance and life expectancy tables) and pay taxes on it.
• Ordinary Income Tax: The standard income tax on wages, interest, and retirement withdrawals (as opposed to special lower rates for things like capital gains). A 401(k) withdrawal is taxed at your ordinary income tax rate, which depends on your total income and tax bracket.
• Qualified Distribution: A retirement account withdrawal that meets certain criteria to be tax-advantaged. For a Roth 401(k), a qualified distribution (age 59½+ and account open 5+ years) is tax-free. For a traditional account, there’s no way to make it tax-free – “qualified” in that context usually refers to avoiding the penalty (e.g., after 59½ or via an exception).
• Tax-Deferred: A characteristic of traditional retirement accounts where you postpone paying taxes on contributions and earnings until you withdraw the money. A traditional 401(k) grows tax-deferred – you’ll pay taxes later, as opposed to a taxable brokerage account where you pay taxes annually on earnings.
• Marginal Tax Bracket: The income tax rate that applies to the last dollar of your income. Additional income (like a 401(k) withdrawal) can be taxed at progressively higher rates if it pushes you into the next bracket. For instance, part of your withdrawal might be taxed at 12%, and the next part at 22% if it crosses the bracket threshold.

⚠️ Mistakes to Avoid After 60 with Your 401(k)

• Assuming “penalty-free” means “tax-free”: Don’t confuse the end of the 10% penalty at 59½ with not owing taxes. You still owe regular income tax on traditional 401(k) withdrawals, even though you’re over 59½.
• Ignoring state taxes: It’s a mistake to overlook state income taxes on your 401(k) withdrawals. Check how your state treats retirement income – you might face a state tax bill even if federal taxes shrink or disappear (as with Roth distributions).
• Taking massive lump sums without planning: Withdrawing a huge amount in one year can spike your tax bracket and needlessly increase your tax rate. It can also trigger higher taxes on Social Security (if you’re drawing it) or higher Medicare premiums down the line. It’s usually smarter to spread distributions over time.
• Neglecting the Roth 5-year rule: If you have a Roth 401(k), make sure you’ve met the 5-year requirement before assuming your withdrawals are completely tax-free. Taking money out of a Roth 401(k) too early (even if you’re over 59½) could lead to taxes on the earnings portion.
• Rolling over too soon in your late 50s: If you left your job at 55-59 and could use the Rule of 55, don’t immediately roll your 401(k) into an IRA without considering the consequences. An IRA won’t allow penalty-free access until 59½, so rolling over could lock up your money or cause penalties if you need it early.
• Forgetting about RMDs: Don’t forget that starting in your early 70s, you’ll have required distributions from a traditional 401(k). Failing to plan for RMDs can result in big mandatory withdrawals later, which might push you into higher tax brackets if you haven’t gradually drawn down or converted some funds earlier.
• Overlooking Social Security and Medicare impacts: Be mindful that 401(k) withdrawals can make previously non-taxable Social Security benefits taxable or bump you into a higher Medicare premium bracket (IRMAA). Always consider the ripple effect of extra income on other benefits.

Comparison: 401(k) vs. IRA Withdrawals After 60

It’s useful to compare how 401(k) withdrawals after 60 stack up against IRA withdrawals, since many people roll their 401(k) into an IRA or have both types of accounts. Here are some key comparisons:

• Taxation: Both traditional 401(k) and traditional IRA withdrawals are taxed as ordinary income federally (and by states that tax income). There’s no tax difference here – $10,000 from a traditional IRA at 60 is taxed the same as $10,000 from a traditional 401(k) at 60. Likewise, Roth IRA withdrawals (if qualified) are tax-free just like Roth 401(k) withdrawals. In short, after 59½, the tax treatment aligns: traditional = taxable, Roth = tax-free (upon qualification).
• Early Withdrawal Rules: The 59½ rule applies to IRAs too, but the Rule of 55 does not. So, a key difference is if you’re retiring between 55 and 59½: a 401(k) can be tapped without penalty (using the Rule of 55) whereas an IRA cannot. After 60, this is less of a concern since you’re past 59½, but it’s worth noting if you’re weighing rolling a 401(k) into an IRA in your late 50s.
• Required Minimum Distributions: Both traditional IRAs and 401(k)s have RMDs starting at age 73 under current law. However, a 401(k) has a “still-working” exception – if you are still employed at 73+ and don’t own more than 5% of the company, you can delay RMDs from that current employer’s 401(k) until you retire. IRAs do not have such an exception; you must take RMDs from traditional IRAs starting at 73 regardless of employment.
• Roth IRAs have no RMDs at all for the original owner, whereas Roth 401(k)s also no longer have RMDs (as of 2024). Before 2024, many would roll Roth 401(k) money into a Roth IRA to avoid RMDs, but now that’s a moot point.
• Withdrawal Flexibility: IRAs generally offer more flexibility in how you withdraw. With a 401(k), you’re subject to your plan’s distribution options – some plans may limit how often you can take distributions or may not allow partial withdrawals, though most modern plans are fairly flexible. Once you roll money into an IRA, you have full control over withdrawals (you can take any amount, any time after 59½).
• Other Considerations: 401(k)s have benefits like strong federal creditor protection and the ability to take loans (if you’re still working). IRAs have annual contribution options even in retirement (if you have earned income), whereas you generally can’t contribute to a 401(k) after leaving the job (though you can keep contributing if you keep working). These aren’t tax differences, but they can influence whether you keep money in a 401(k) or move it to an IRA around age 60.

In summary, from a tax perspective, 401(k) and IRA withdrawals after 60 are treated similarly. The biggest differences lie in early access rules and RMD timing. Many people roll their 401(k) into an IRA at retirement for simplicity and control. Just be sure to time any rollover wisely if you’re utilizing provisions like the Rule of 55, and remember that moving to an IRA won’t make any taxable money tax-free – it keeps the same tax status.

FAQ

Q: At what age can I withdraw from my 401(k) completely tax-free?
A: Traditional 401(k) withdrawals are taxable at any age. There’s no age when they automatically become tax-free. Only Roth 401(k) distributions can be tax-free (if you’re 59½+ and meet the 5-year rule).

Q: Do I pay taxes on 401(k) withdrawals after 60?
A: Yes. Traditional 401(k) withdrawals after 60 are still subject to income tax (federal and state, if applicable). The only time you’d pay no tax is if it’s Roth 401(k) money that qualifies as tax-free.

Q: Which states don’t tax 401(k) distributions?
A: States with no income tax (like Florida, Texas, etc.) won’t tax 401(k) withdrawals. Additionally, Illinois, Mississippi, Pennsylvania, and Iowa don’t tax 401(k)/IRA withdrawals. Most other states tax retirement distributions as ordinary income.

Q: How can I minimize taxes on my 401(k) withdrawals?
A: Take withdrawals gradually to stay in a lower tax bracket. Consider moving to a tax-friendly state, and use strategies like Roth conversions or timing withdrawals for years when you have less other income.

Q: Will 401(k) withdrawals make my Social Security taxable?
A: They can. 401(k) withdrawals count as income in the IRS formula for Social Security taxation. If your total income exceeds certain thresholds, up to 85% of your Social Security benefit becomes taxable.

Q: Do 401(k) withdrawals affect Medicare premiums?
A: Potentially, yes. Large 401(k) withdrawals can raise your income above Medicare’s IRMAA thresholds. That means you might pay higher Medicare Part B and Part D premiums a couple of years after a high-income year.

Q: What is the 5-year rule for Roth 401(k)?
A: It’s the requirement that a Roth 401(k) account be at least five tax years old before its earnings can be withdrawn tax-free. This applies on top of being 59½ or older.

Q: Can I withdraw from my 401(k) at 60 while still working?
A: Yes, if your plan allows in-service withdrawals at 59½ or older (many do). You can take money out at 60 while still employed, and it will be taxed normally as a distribution (no 10% penalty).

Q: Should I take a lump sum or spread out 401(k) withdrawals?
A: Spreading withdrawals over years usually lowers your overall tax burden. A single large lump sum can push you into a higher tax bracket, so taking smaller annual withdrawals is generally more tax-efficient.

Q: Are 401(k) withdrawals considered earned income?
A: No. 401(k) withdrawals are taxable income but not “earned” income. They don’t count as wages for things like IRA contribution eligibility or calculating your Social Security earnings record.