June 29, 2023

Understanding Retirement Withdrawals After 59 1/2 Years Old

Once you hit 59 ½ years of age, you are allowed to withdraw money from retirement accounts (think 401k, 403b, IRAs, and SIMPLE IRAs) without paying a 10% early withdrawal penalty on the amount taken out. Taxes do come into play, depending on the type of account you have.

Traditional 401k, 403b, IRA, SIMPLE IRA, and SEP IRA

Traditional” accounts are pre-tax and historically have been the most common type of retirement account. These accounts are tax-deferred, meaning all contributions to the account were deducted from income for tax purposes in the year of the contribution.

This lowers taxable income during that year and allows taxes to be deferred to a future date when withdrawals occur. At the time of withdrawal, taxes must be paid at ordinary income rates.

As a quick overview, there are currently seven federal ordinary income tax brackets ranging from 12% to 37%.

Roth 401ks and Roth IRAs

“Roth” IRAs have only been around since 1997, and though not as prolific as traditional accounts, are quickly gaining ground. Roth accounts differ in that contributions are made with after-tax dollars, i.e., money that you have already paid taxes on.

Since Roth accounts are funded with after tax-dollars, they grow tax free and are not taxed when distributed. Any funds withdrawn from Roth accounts after age 59 ½ are not included in gross income for tax purposes.

Since distributions from retirement accounts can impact tax brackets, it is important to manage the type of accounts money is pulled from in any given year. Having both Traditional and Roth accounts gives flexibility towards funding your retirement.

Managing Taxes

Managing withdrawals to be more tax-efficient is a benefit of developing a comprehensive financial plan. For example, if still working but needing to withdraw funds from retirement accounts, it would be important to take into consideration what income level you happen to be at.

If close to the next tax or Medicare bracket, it may be advisable to withdraw funds from Roth or non-retirement accounts first, in order to avoid stepping up to the next marginal tax rate. If in a low bracket with room to spare before the next increase, withdrawing from a traditional account might make more sense to take advantage of the low current bracket without going up into the next level.

These income decisions are made annually, with a lens towards the future, and aim to minimize both current and future taxes.

Other Income Considerations

A common misconception is that money withdrawn from a retirement plan (401k, SIMPLE IRA, IRA, etc.) can reduce your social security benefits. This is not the case, as Social Security benefits can only be reduced by earned income (wages). Withdrawals do have an impact, however, on how much of your monthly Social Security benefits are taxed, as well as what Medicare premiums you are being charged.

For a deeper dive on the particulars surrounding how Social Security is taxed, take a look at our Social Security article. To learn more about thresholds for increased Medicare premiums, check out our Medicare article.

It quickly becomes apparent that both pre- and post-tax accounts can be used to manage taxes in an advantageous way in retirement. A comprehensive financial plan helps determine if those decisions are made in an appropriate manner and in line with short- and long-term goals. Reach out to us with questions on how a financial plan might be able to add clarity to your financial situation and assist managing withdrawals from retirement accounts.


SSA.Gov https://www.ssa.gov/benefits/retirement/planner/taxes.html

IRS.Gov https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,500 total), $1,000 for IRAs ($8,000 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more
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