How are 401k withdrawals taxed when you retire?

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Derivative
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How are 401k withdrawals taxed when you retire?

Post by Derivative » Sun Dec 10, 2017 2:24 pm

How are 401k withdrawals taxed when you retire? If you retire, and do not work, wouldn't your tax bracket be close to 0%?

If I am going to be a doctor and make $300k+. What would my 401k withdrawals be taxed at when I withdraw them? When should I withdraw them?

I am just seeing if I would be better contributing to Roth vs non-Roth and how much of a difference it really makes and what the tax scenario would be when I retire. I am confused as to why there would be a big difference if people cut back on hours or stop working during retirement?

Thank you.

Jack FFR1846
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Re: How are 401k withdrawals taxed when you retire?

Post by Jack FFR1846 » Sun Dec 10, 2017 2:28 pm

It doesn't link to being retired, it links to all of your income. Consider 401k withdrawals beyond 59.5 as simply your new job. Add to income as you do now with actual income. Indeed, if you have low enough income, you may have no tax or a very low bracket.
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Soon2BXProgrammer
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Re: How are 401k withdrawals taxed when you retire?

Post by Soon2BXProgrammer » Sun Dec 10, 2017 2:29 pm

if you are high income/marginal tax now... generally normal pretax contributions work out... when it goes in you save 30% when it comes out.. it comes out as income.. if you don't have any other income.. you get to first fill up the lower tax brackets. 0/10/15/25 etc...

it starts to get complicated, if you have pensions, and other retirement income... and you have already deferred so much money that it will fill the 25% bracket for all of your retirement years....

an example. married public sector workers that both have pensions and social security... can end up in a decently high tax bracket in retirement that their IRA distributions would be coming out at... might not be that much different then their marginal bracket while working.... in this case... they need to think about... does roth make more sense..
Last edited by Soon2BXProgrammer on Sun Dec 10, 2017 2:30 pm, edited 1 time in total.

retiredjg
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Re: How are 401k withdrawals taxed when you retire?

Post by retiredjg » Sun Dec 10, 2017 2:30 pm

Whatever you take out of your 401k will be taxed at your ordinary tax rate. Your ordinary tax rate is likely to be less in retirement than while working.

A person making that much money should almost always be using tax-deferred 401k, to the max.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

The Wizard
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Re: How are 401k withdrawals taxed when you retire?

Post by The Wizard » Sun Dec 10, 2017 2:51 pm

retiredjg wrote:
Sun Dec 10, 2017 2:30 pm
Whatever you take out of your 401k will be taxed at your ordinary tax rate. Your ordinary tax rate is likely to be less in retirement than while working...
First sentence is basically correct, but unlike employment income, the 7.65% for FICA is not deducted. So your net income is higher.

Second sentence is likely true for 95%+ of retirees, but for folks who have maxed their retirement plans for many years with good employer match and delayed SS until 70, it's possible to have higher taxable income and higher tax in retirement than when working. I do...
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Watty
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Re: How are 401k withdrawals taxed when you retire?

Post by Watty » Sun Dec 10, 2017 3:11 pm

This is a wiki on making this choice.
https://www.bogleheads.org/wiki/Traditional_versus_Roth
Derivative wrote:
Sun Dec 10, 2017 2:24 pm
What would my 401k withdrawals be taxed at when I withdraw them?
Under the current tax laws an over 65 couple can have almost $100K in taxable income and still be in the 15% federal tax bracket. Of course that could literally change next week, or ten years from now.

With child raising and college expenses done and a paid off house $100K a year in income will support a VERY nice lifestyle anywhere.

State taxes, changes in marital status, the way Social Security is taxed, and tax law changes over 50+ years can greatly complicate this.

For someone that is on track to make $300K someday a VERY broad guideline of what to do based on their federal tax bracket would be;

1) 15% or less tax bracket use a Roth
2) 25% it is a tossup. My personal call would be to use a deductible account unless you have a compelling reason not to. More people than you might expect have career, health, or life setbacks that cause them to not be as wealthy in retirement as planned so when you are younger it is much harder to reliably project a high retirement income. The next higher tax bracket is only 3% higher at 28% so that is not a very big deal if you end up in the 28% tax bracket in retirement. It takes a LOT of income to be above the 28% tax bracket in retirement.
3) Higher than 25%, use the deductible retirement account.

With more research you may very well be able to justify doing something else but for most people having a mixture of account types is the best answer so choosing "incorrectly" can still mean that you made a really good choice even if it was not the best choice.

rkhusky
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Re: How are 401k withdrawals taxed when you retire?

Post by rkhusky » Mon Dec 11, 2017 2:38 pm

For many people maxing Traditional 401k and Roth IRA provides a good mix.

DavidRoseMountain
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Re: How are 401k withdrawals taxed when you retire?

Post by DavidRoseMountain » Mon Dec 11, 2017 3:29 pm

And one can always rollover traditional 401k into a roth ira and choose when the tax bracket is favorable.

smitcat
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Re: How are 401k withdrawals taxed when you retire?

Post by smitcat » Mon Dec 11, 2017 3:39 pm

The Wizard wrote:
Sun Dec 10, 2017 2:51 pm
retiredjg wrote:
Sun Dec 10, 2017 2:30 pm
Whatever you take out of your 401k will be taxed at your ordinary tax rate. Your ordinary tax rate is likely to be less in retirement than while working...
First sentence is basically correct, but unlike employment income, the 7.65% for FICA is not deducted. So your net income is higher.

Second sentence is likely true for 95%+ of retirees, but for folks who have maxed their retirement plans for many years with good employer match and delayed SS until 70, it's possible to have higher taxable income and higher tax in retirement than when working. I do...
"First sentence is basically correct, but unlike employment income, the 7.65% for FICA is not deducted. So your net income is higher."
FWIW - as a solo practitioner his FICA will be twice that or 15.3%.

smitcat
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Re: How are 401k withdrawals taxed when you retire?

Post by smitcat » Mon Dec 11, 2017 3:42 pm

Watty wrote:
Sun Dec 10, 2017 3:11 pm
This is a wiki on making this choice.
https://www.bogleheads.org/wiki/Traditional_versus_Roth
Derivative wrote:
Sun Dec 10, 2017 2:24 pm
What would my 401k withdrawals be taxed at when I withdraw them?
Under the current tax laws an over 65 couple can have almost $100K in taxable income and still be in the 15% federal tax bracket. Of course that could literally change next week, or ten years from now.

With child raising and college expenses done and a paid off house $100K a year in income will support a VERY nice lifestyle anywhere.

State taxes, changes in marital status, the way Social Security is taxed, and tax law changes over 50+ years can greatly complicate this.

For someone that is on track to make $300K someday a VERY broad guideline of what to do based on their federal tax bracket would be;

1) 15% or less tax bracket use a Roth
2) 25% it is a tossup. My personal call would be to use a deductible account unless you have a compelling reason not to. More people than you might expect have career, health, or life setbacks that cause them to not be as wealthy in retirement as planned so when you are younger it is much harder to reliably project a high retirement income. The next higher tax bracket is only 3% higher at 28% so that is not a very big deal if you end up in the 28% tax bracket in retirement. It takes a LOT of income to be above the 28% tax bracket in retirement.
3) Higher than 25%, use the deductible retirement account.


"1) 15% or less tax bracket use a Roth
2) 25% it is a tossup. My personal call would be to use a deductible account unless you have a compelling reason not to. More people than you might expect have career, health, or life setbacks that cause them to not be as wealthy in retirement as planned so when you are younger it is much harder to reliably project a high retirement income. The next higher tax bracket is only 3% higher at 28% so that is not a very big deal if you end up in the 28% tax bracket in retirement. It takes a LOT of income to be above the 28% tax bracket in retirement.
3) Higher than 25%, use the deductible retirement account
With more research you may very well be able to justify doing something else but for most people having a mixture of account types is the best answer so choosing "incorrectly" can still mean that you made a really good choice even if it was not the best choice.
Unless you plan to earn in a high tax state and retire in a no tax state - then the cals become much simpler.

The Wizard
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Re: How are 401k withdrawals taxed when you retire?

Post by The Wizard » Mon Dec 11, 2017 3:54 pm

smitcat wrote:
Mon Dec 11, 2017 3:39 pm
The Wizard wrote:
Sun Dec 10, 2017 2:51 pm
retiredjg wrote:
Sun Dec 10, 2017 2:30 pm
Whatever you take out of your 401k will be taxed at your ordinary tax rate. Your ordinary tax rate is likely to be less in retirement than while working...
First sentence is basically correct, but unlike employment income, the 7.65% for FICA is not deducted. So your net income is higher.

Second sentence is likely true for 95%+ of retirees, but for folks who have maxed their retirement plans for many years with good employer match and delayed SS until 70, it's possible to have higher taxable income and higher tax in retirement than when working. I do...
"First sentence is basically correct, but unlike employment income, the 7.65% for FICA is not deducted. So your net income is higher."
FWIW - as a solo practitioner his FICA will be twice that or 15.3%.
Good point. I missed that somehow.
So 1099-R income even better in that case!
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Doc
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Re: How are 401k withdrawals taxed when you retire?

Post by Doc » Tue Dec 12, 2017 9:21 am

Re FICA:

You may not be paying FICA but you will be paying tax on your Social Security. It's a somewhat complicated calc but expect to pay tax on $0.85 of your SS for each $1.00 of your 401k withdrawal. This makes your marginal tax rate 28% while still in the 15% bracket. Of course once you pay the tax on all the SS your marginal rate drops back.

Grabiner once reported that the SS phaseout also can occur in the 25% bracket but I didn't confirm that.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

mptfan
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Re: How are 401k withdrawals taxed when you retire?

Post by mptfan » Tue Dec 12, 2017 11:22 am

Jack FFR1846 wrote:
Sun Dec 10, 2017 2:28 pm
It doesn't link to being retired, it links to all of your income.
Exactly. Being retired is irrelevant.

modulusmath
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Re: How are 401k withdrawals taxed when you retire?

Post by modulusmath » Wed Feb 14, 2018 4:39 pm

That was my question as well - if I'm not oversimplifying. If it's Dec 31 and one has (name a figure you are comfortable with and high enough to make sense) in a 401k/Rollover, it seems like a good idea to not work (literally retire) on Jan 1 and have the taxes drop as far as possible for that year - understanding there's no way to know exaclty what taxes will be in the future.

I.E assuming for a moment you were in a %35 bracket and you drop to %10..... :D
That could be a huge win financially.

mattshwink
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Re: How are 401k withdrawals taxed when you retire?

Post by mattshwink » Wed Feb 14, 2018 4:58 pm

modulusmath wrote:
Wed Feb 14, 2018 4:39 pm
That was my question as well - if I'm not oversimplifying. If it's Dec 31 and one has (name a figure you are comfortable with and high enough to make sense) in a 401k/Rollover, it seems like a good idea to not work (literally retire) on Jan 1 and have the taxes drop as far as possible for that year - understanding there's no way to know exaclty what taxes will be in the future.

I.E assuming for a moment you were in a %35 bracket and you drop to %10..... :D
That could be a huge win financially.
Not only that, but it is also beneficial to mix (Trad 401k) with tax free (Roth). So let's say you think you will need $120,000 a year during retirement (10k per month). The current (2018) system the 12% tax bracket (if you are married filing jointly) goes up to $77,400. The standard deduction is $25,000. So $77,400+$25,000=$102,500. ($77,400-$19,050)*.12=$7,002+$1,905=$8,907 tax paid for a $102,500 withdrawal, so $93,593 remaining. You need $120,000, though, so you need to further pull $26,407 from your Roth. This keeps you at a 12% marginal rate but with your $120,000. The effective tax rate for that 120,000 is 7.4%.

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Doc
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Re: How are 401k withdrawals taxed when you retire?

Post by Doc » Wed Feb 14, 2018 5:23 pm

mattshwink wrote:
Wed Feb 14, 2018 4:58 pm
This keeps you at a 12% marginal rate but with your $120,000.
If you are taking your social security your marginal rate could be 22% not 12%.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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