You begin to enjoy new income but you must also face its tax consequences when you withdraw funds or take distributions from your 401(k) in retirement. Distributions are taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income but the tax burden you’ll incur varies by the type of account you have: a traditional 401(k) or a 澳洲幸运5官方开奖结果体彩网:Roth 401(k). I🥀t also depends on when you withdraw fu💟nds from your account.

Traditional 401(k) Contributions

Savings contributions into a traditional 401(k) are paid with 澳洲幸运5官方开奖结果体彩网:pre-tax dollars. They were taken off the top of your gross salary, reducing your taxable earned income by the amount of the contributions and therefore reducing the taxes you pay that year. Those taxes therefore come due on your 401(k) funds when you take distributions and withdraw the money in retirement.

The distributions from these plans are usually taxed as ordinary income at the rate for your tax bracket in the year you make the withdrawal. You may qualify for special tax treatment, however, if you were born before Jan. 2, 1936 and you take your 401(k) as a lump sum.

Taxes on a Traditional 401(k)

Let's say a married couple files a joint tax return. They earn $90,000 together. They take the standard deduction of $30,000 for the 2025 tax year. They make no other adjustments so their taxable income is $60,000. They must pay $6,723 in federal taxes: (10% x $23,850) + [12% x ($60,000 -$23,850] due to how 澳洲幸运5官方开奖结果体彩网:effective tax rates work. They'd owe additional taxes if their income rises enough to enter a higher tax brack🦋et or add mꦓore income to the bracket they're in.

It's therefore necessary to consider how 澳洲幸运5🐠官方开奖结果体彩网:401(k) withdrawals that 𝄹are required after age 73 or age 75 if you turn 74 after Dec. 31, 2032 can affect your tax bill when you add in your other income.

"Taxes on your 401(k) distributions are important," says , president of C.L. Sheldon & Company LLC in Alexandria, Virginia. "But what is more important is, 'What will your 401(k) distributions do to your other taxes and fees?'" Sheldon cites the 澳洲幸♋运💛5官方开奖结果体彩网:taxation of Social Security benefits as an example.

Social Security retirement benefits aren't subject to income tax unless the recipient's overall annual income exceeds a certain amount. A sizable 401(k) distribution could push someone's income over that limit, causing a large chunk of Social Security benefits to become taxable when they would have been untaxed had the distribution not been made.

Distributions from traditional 401(k) and traditional IRA accounts are taxed incrementally like other income. Steadily higher rates apply to progressively higher income tiers. Rates were reduced by the Tax Cuts and Jobs Act (TCJA) of 2017 but the basic structure and the graduated rates remain intact across seven tax brackets. This reduction is set to expire after 2025.

How Roth 401(k)s Are Taxed 

The tax situation is different with a Roth 401(k). The money you contribute to a Roth 401(k) is made with after-tax dollars as it is with a Roth IRA. You don't get a tax deduction for the contribution at the time you make it. You’ve already been taxed on your contributions so you likely won't be taxed on your distributions provided your 澳洲幸运5官方开奖结果体彩网:distributions are qualified.

No Taxes on Qualified Distributions

Two fa♍ctors determine whether a distribution is qualified. The Roth account must have been established at least five years ago and you must be old enough to make withdrawals without a penalty.

"While the designated Roth 401(k) grows tax-free, be careful that you 澳洲幸运5官方开奖结果体彩网:meet the five-year aging rule and the plan distribution rules to receive tax-free distꦅribution treatment once you reach the age of 59½," says , founder of Dougherty & Assoc❀iates in Cincinnati, Ohio.

Taxes Owed on Employer Matching Contributions

Your Roth 401(k) isn't completely in the clear tax-wise. You must pay taxes on the money when you make withdrawals in retirement if your employer matches your Roth account contributions. These matches are taxed as ordinary income.

Special 401(k) Tax Strategies

Certain other strategies may result in a less painful tax bite for some taxpayers.

Declare Company Stock a Capital Gain

Some companies reward employees with stock and encourage the recipients to hold those investments within their 401(k)s or other retirement accounts. This arrangement can 澳洲幸运5官方开奖结果体彩网:have disadvantages but 🔯💜it can also mean more favorable tax treatment.

, MS, CFP, owner of RetireRight Financial Planning, says, "Employer stock held in the 401(k) can be eligible for 澳洲幸运5官方开奖结果体彩网:net unrealized appreciation treatment. What this means is the growth of the stock above the basis is treated to 澳洲幸运5官方开奖结果体彩网:capital gain rates, n꧟ot [as] ordinary income. This can amount to huge tax savings. 🥃Too many participants and advisors miss this when distributing the money or rolling over the 401(k) to an IRA."

Financial planners generally consider paying the long-term 澳洲幸运5官方开奖结果体彩网:capital gains tax to be more advantageous than incurring income tax. The capital gains tax rates are typically 0% and 15% depending on your income. Individuals and couples making more than $533,400 and $600,050 respectively will pay a 20% long-term capital gains tax in 2025.

There are a few exceptions. The capital gains tax rate can be 25% or 28% in a few transactions such as those involving certain types of real estate and collectibles.

Rollover Funds

You can still avoid taxation on your Roth 401(k) earnings if your Roth account doesn't meet the five-year rule and/or you're under age 59½. Your withdrawal must be for a rollover. No additional taxes are incurred if your funds are being moved into another retirement plan or a spouse's plan via a 澳洲幸运5官方开奖结果体彩网:direct rollover. The funds are distributed to 💯𓆏the account holder rather than from one institution to another.

The funds must be deposited into another Roth 401(k) or Roth IRA account within 60 days to avoid taxation if the rollover isn't direct.

The Bottom Line

Managing and minimizing the 澳洲幸运5官方开奖结果体彩网:tax burden of your 401(k) begin♏s with the choice between a Roth 401(k) that's funded with after-tax contributions and a traditional 401(k) that✃ receives pre-tax income. Some professionals advise holding both types of plans to minimize the risk of paying all the resulting taxes now or paying all of them later.

The choice between Roth and regular accounts will depend on individual factors such as your age, income, tax bracket, and whether you're married. It’s wise to seek professional advice from a fiduciary given the complexity of weighing those considerations. Fiduciary advice providers must act in their client's best interests, avoid misleading statements, and charge only reasonable fees for their services under the terms of the 澳洲幸运5官方开奖结果体彩网:Retirement Security Rule.