Tax Considerations When Drawing From 401(k)s in Retirement.

At Duncan Williams Asset Management, we know traditional 401(k) withdrawals in retirement are generally taxed as ordinary income. When and how you draw from these accounts can significantly affect both your lifetime tax bill and the net income you actually spend.

How traditional 401(k) withdrawals are taxed

For many workers, traditional 401(k) contributions are made on a pre-tax basis. This provides an upfront tax deduction and allows investments to grow tax-deferred over time. In retirement, however, distributions from a traditional 401(k) are typically included in your taxable income. They are taxed at your marginal federal and state income tax rates for that year.

Plan administrators report distributions on Form 1099-R. Unless funds are rolled directly to another eligible retirement account, those withdrawals are taxable in the year you receive them. As a result, traditional 401(k)s often become one of the more heavily taxed sources of retirement income. Some other accounts may benefit from capital gains or other preferential tax treatment.

At Duncan Williams Asset Management, we help clients understand how each dollar they withdraw from a 401(k) fits into their broader income picture. This way, they can avoid unpleasant surprises at tax time and make informed choices about their retirement “paycheck.”

Early withdrawals and penalties

Retirement plans are designed for long-term goals. Withdrawing from a traditional 401(k) before age 59½ generally triggers an additional 10% early distribution penalty on top of regular income tax, unless you qualify for a specific IRS exception. Some newer rules and plan provisions allow limited penalty-free access under certain circumstances, such as in emergencies. However, these distributions usually still count as taxable income.

Because early withdrawals can push you into a higher tax bracket and erode savings that benefit from tax-deferred growth, our advisors encourage clients to evaluate these decisions carefully as part of a broader financial plan. Coordinating the timing of 401(k) withdrawals with other income sources—like wages, business income, or portfolio distributions—can reduce the overall tax impact.

Required minimum distributions (RMDs)

At a certain point—currently age 73 for many retirees—the IRS requires you to begin taking minimum distributions from tax-deferred accounts such as traditional 401(k)s. If you don’t withdraw at least the required minimum amount, you may face a significant excise tax on the shortfall. This can sharply increase the cost of non-compliance.

Because RMDs are generally taxable as ordinary income, they can unintentionally push retirees into higher marginal tax brackets. They may also increase the taxation of Social Security benefits and surcharges on Medicare premiums. At Duncan Williams Asset Management, we work with clients to anticipate these milestones. Where appropriate, we explore strategies like partial Roth conversions or modest pre-RMD withdrawals to help smooth taxable income over time.

Why tax‑aware withdrawal planning matters

Because 401(k) withdrawals are treated as ordinary income, the sequence in which you tap different account types matters. These include taxable, tax-deferred, and tax-free accounts. The order can meaningfully influence how long your portfolio lasts and how much you ultimately pay in taxes. A common framework is to consider using taxable accounts first. Then draw from tax-deferred accounts, such as traditional 401(k)s and IRAs. Preserve Roth balances for later years or legacy goals. Tailor this approach to each client’s tax brackets, cash needs, and RMD obligations.

We view retirement income as a multi-year planning opportunity, not a one-time decision. By taking advantage of “tax-friendly” years—periods when your income is temporarily lower—you may be able to draw more from traditional 401(k)s or convert a portion to Roth accounts at potentially lower tax rates. Coordinating these moves with a tax professional and a trusted advisor can help reduce future RMDs. This can increase flexibility and better align your withdrawal strategy with your long-term goals.

If you’re nearing retirement or already using your 401(k), Duncan Williams Asset Management can help you review your withdrawal strategy and find ways that thoughtful tax planning may help you save more.

Sources

Sources: Internal Revenue Service publications on retirement plan distributions and individual retirement arrangements; independent academic and professional research on tax‑efficient retirement withdrawal strategies; and non‑commercial educational materials focused on retirement income planning.

Disclosure

Disclosure: This material is for informational and educational purposes only and should not be construed as specific tax, legal, or investment advice. Tax laws and regulations are subject to change, and their application may vary based on individual circumstances. Before making any decisions regarding 401(k) withdrawals or retirement income strategies, you should consult with a qualified tax professional and/or financial advisor. Past strategies may not be appropriate for your situation, and there is no guarantee that any planning approach will achieve its intended results.

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