How to Minimize Taxes on 401(k) Withdrawals After Retirement

For decades, you’ve worked to build your 401(k), but when retirement begins, the conversation shifts. The question is no longer how much you’ve saved. It’s how much of those savings you can keep after taxes.

Without careful planning, 401(k) withdrawals can push you into a higher tax bracket, trigger Medicare premium surcharges, and increase the taxable portion of your Social Security benefits. A coordinated approach to withdrawal timing, Roth conversions, and income planning can help you preserve significantly more of what you’ve saved.

How 401(k) Withdrawals Are Taxed

Traditional 401(k) accounts are tax-deferred, meaning contributions and investment growth accumulate without current taxation. Distributions are then taxed as ordinary income when withdrawn, layered on top of Social Security, pensions, investment income, and any earned income.

Withdrawals before age 59½ generally incur an additional 10% penalty unless an exception applies — and even after 59½, withdrawals can ripple into Medicare premiums through Income Related Monthly Adjustment Amounts (IRMAAs) and increase the taxable portion of Social Security benefits up to 85%.

Three Core Strategies

1. Manage Your Tax Brackets Year by Year

Federal income taxes are progressive, so large lump-sum withdrawals can be costly. The years between retirement and the start of Social Security or required minimum distributions (RMDs) are often a planning sweet spot, when taxable income is temporarily low.

A married couple over age 65 in 2026 can take a standard deduction of roughly $35,500 before owing any federal income tax, then fill the 10% and 12% brackets at historically low rates. Strategically pulling income into these years, rather than letting it compound into larger RMDs later, is one of the most powerful levers in retirement tax planning.

2. Use Roth Conversions Strategically

A Roth conversion moves assets from a traditional 401(k) or IRA into a Roth IRA. Taxes are due on the converted amount today, but future qualified withdrawals are tax-free, and Roth IRAs are not subject to RMDs during the owner’s lifetime.

Conversions during lower-income years allow retirees to pay tax at today’s known rates while shrinking the tax-deferred balance that will eventually drive RMDs. They also hedge against the “widow’s penalty” — the higher single-filer brackets the surviving spouse will face — and create tax-free assets that pass to heirs outside the bite of the SECURE Act’s 10-year distribution rule-.

Because conversions raise income in the year they occur, watch IRMAA thresholds carefully; Medicare uses income reported two years earlier, so a 2026 conversion affects 2028 premiums.

3. Coordinate Among All Income Sources

Most retirees have three “tax buckets”: taxable brokerage accounts; tax-deferred (401(k)s/IRAs); and tax-free (Roth, HSAs). Drawing from the right bucket at the right time can keep you below key thresholds, the next tax bracket, IRMAA cliffs, and the Net Investment Income Tax line at $250,000 (joint).

A simplified sequencing framework looks like this:

• Ages 65–72: Live primarily on taxable accounts and modest 401(k) withdrawals. Execute Roth conversions up to a target bracket. Delay Social Security.
• Age 70: Claim Social Security at the maximum benefit.
• Ages 73+: Take RMDs (now smaller, thanks to earlier conversions), use Roth withdrawals to manage brackets, and direct charitable giving through Qualified Charitable Distributions (QCDs).

Managing Required Minimum Distributions

Most individuals must begin RMDs by April 1 of the year after the year they turn 73 (age 75 for those born in 1960 or later). The amount is based on age and account balance, using IRS life expectancy tables and missed RMDs trigger a 25% excise tax reducible to 10% if corrected promptly under SECURE 2.0.

Several strategies can reduce RMDs before they begin or after they start:

• Roth conversions in your 60s shrink the future RMD base.
• QCDs allow IRA owners age 70½ and older to send up to $111,000 (2026) directly to charity, satisfying RMDs without increasing taxable income.
• The “still working exception” lets employees who don’t own 5% or more of their employer delay RMDs from that specific 401(k) until they retire.
• Qualified Longevity Annuity Contracts (QLACs) allow up to $210,000 of IRA or 401(k) assets to be excluded from the RMD calculation until payments begin (as late as age 85).

A Strategy Worth Knowing: Net Unrealized Appreciation

For executives and long-tenured employees holding employer stock in a 401(k), Net Unrealized Appreciation (NUA) treatment can be transformative. Done correctly, the stock is distributed in kind, and the appreciation is taxed at long-term capital gains rates rather than ordinary income rates; often a difference of 15 to 20 percentage points. The election is irrevocable and the rules are strict, but for the right client, the savings can be substantial.

An Illustration

Consider a married couple, both 66, recently retired with $1.5 million in traditional 401(k)s, $400,000 in a taxable brokerage account, and projected Social Security benefits of $70,000 combined at age 70. Without planning, their RMDs at 73 could exceed $90,000 annually and stack on top of Social Security, pushing them into the 24% bracket and triggering IRMAA surcharges.

With planning, they spend down taxable assets in their late 60s, delay Social Security to 70, and convert roughly $80,000 per year from their 401(k) to a Roth, staying within the 12% bracket. By 73, their tax-deferred balance is materially smaller, their RMDs are manageable, and they have a meaningful tax-free Roth balance for later years and heirs. Over a 30-year retirement, the difference can exceed several hundred thousand dollars in lifetime taxes.

Common Mistakes that Cost Retirees Money

• Taking large, one-year withdrawals that spike brackets, Social Security taxation, and Medicare premiums simultaneously.
• Waiting too long to begin Roth conversions, missing the low-income gap years between retirement and RMDs.
• Ignoring IRMAA cliffs, where one extra dollar of income can cost thousands in Medicare surcharges.
• Overlooking estate implications, particularly the SECURE Act’s 10 year rule, which forces most non-spouse heirs to drain inherited IRAs within a decade.
• Failing to coordinate spouses’ income and claiming strategies, especially for the survivor’s future tax-filing status.

FAQs

Are 401(k) withdrawals taxed differently by state? Yes. Some states impose no income tax, while others exempt Social Security, pensions, or retirement distributions based on age. State treatment can materially affect relocation and residency decisions.

Can I convert my 401(k) to a Roth IRA without paying taxes? Generally, no — conversions create taxable income in the year they occur. However, spreading conversions across multiple lower-income years can significantly reduce the total tax cost.

Do 401(k) withdrawals affect Social Security taxes? Yes. They can make up to 85% of Social Security benefits taxable. Roth withdrawals, by contrast, don’t count toward “provisional income” used in that calculation.

Is there any way to withdraw from a 401(k) tax-free? Qualified Roth withdrawals are tax-free if age and holding period requirements are met. For most retirees, the practical goal isn’t eliminating tax but minimizing lifetime tax liability.

How do 401(k) withdrawals affect Medicare premiums? IRMAAs use income reported two years earlier, so a large withdrawal today may raise Medicare premiums in a future year, often unexpectedly.

Final Thoughts

Tax planning for 401(k) withdrawals isn’t a one-time decision made at retirement. It’s an ongoing process, and the choices made in the first five years of retirement can swing lifetime taxes by six figures or more.

To evaluate Roth conversion opportunities before year-end or to build a coordinated withdrawal plan tailored to your full financial picture, contact the Nixon Peabody Trust Company to schedule a retirement income review.

Mark Hannon
Director of Tax Services
+1 617.345.1064
mhannon@nixonpeabody.com

Bryan MacDonald
Tax Services Manager
+1 617.345.6042
bmacdonald@nixonpeabody.com