Does 401k Count as Income When You Retire?

Shawn Plummer

CEO, The Annuity Expert

Understanding 401k and Retirement Income

When you retire, the money you withdraw from your 401k account is considered taxable income. This means that it is treated similarly to income you receive from other sources, like a job, but with some specific differences.

Tax Implications of 401k Withdrawals

  1. Tax-Deferred Status: The contributions you made to your 401k were likely tax-deferred, meaning you didn’t pay taxes on that money when you earned it.
  2. Withdrawal Taxes: When you retire and start withdrawing from your 401k, those withdrawals are taxed as ordinary income at your current tax rate.
  3. Required Minimum Distributions (RMDs): Starting at age 72, you are required to take minimum distributions from your 401k, which are also taxed as income.

Impact on Social Security and Medicare

  1. Social Security Benefits: Your 401k withdrawals may affect the taxation of your Social Security benefits. A higher income can lead to a larger portion of your Social Security benefits being taxed.
  2. Medicare Premiums: Higher income in retirement can also affect your Medicare Part B premiums, potentially increasing them.

Examples

  • Example 1: If you withdraw $40,000 a year from your 401k, this amount is added to your total annual income and taxed accordingly.
  • Example 2: If your total income (including 401k withdrawals) crosses a certain threshold, a larger portion of your Social Security benefits may be subject to taxes.

Taxation of 401k Withdrawals

AgeWithdrawal AmountTaxable Income?Affects Social Security Taxation?Affects Medicare Premiums?
Under 59.5Any AmountYes (Plus Penalty)YesYes
59.5 to 72Any AmountYesYesYes
72 and aboveRequired Minimum Distribution or MoreYesYesYes

Conclusion

In summary, money withdrawn from your 401k in retirement does count as taxable income. This can impact your overall tax liability, the taxation of Social Security benefits, and Medicare premiums. Understanding these implications is crucial for effective retirement planning.

For a comprehensive review of your retirement plan and its tax implications, contact us today for a free quote.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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