When you withdraw funds from your 401(k)—or "take distributions," in IRS lingo—you begin to enjoy the income from this retirement mainstay and face its tax consequences. For most people, and with most 401(k)s, distributions are taxed as ordinary income.1 However, the tax burden you’ll incur varies by the type of account you have: traditional or Roth 401(k), and by how and when you withdraw funds from it.
Distributions from a regular, or traditional, 401(k) are fairly simple in their tax treatment.
Your contributions to the plan were paid with pre-tax dollars, meaning they were taken "off the top" of your gross salary, reducing your taxable earned income and, thus, the income taxes you paid at that time. Because of that deferral, taxes become due on the 401(k) funds once the distributions begin.
That upward creep in the tax rate makes it important to consider how 401(k) withdrawals, which are required after you turn 72, may affect your tax bill once they're added to other income. "Taxes on your 401(k) distributions are important," says Curtis Sheldon, CFP®️, president of C.L. Sheldon & Company LLC in Alexandria, Va. "But what is more important is, 'What will your 401(k) distributions do to your other taxes and fees?'"