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How will my 401(k) withdrawal and resulting adjusted annual income be taxed?

I am 70 years old and fully retired - I have annual income of $70,000, made up of Social Security payments totaling $31,000 and a yearly pension of $39,000 provided by a former employer. According to the 2017 tax rate charts, that would place me in the 25% tax bracket. I am interested in taking a $50,000 withdrawal from my 401(k) plan. Typically firms administering the 401(k) plans would hold 10% of the requested withdrawal for federal tax purposes. However, after this withdrawal would my total taxable income become $120,000 ($70K income plus $50K withdrawal), moving me into the 28% tax bracket? Also, because my plan administrator is holding 10% of the withdrawal for tax purposes, how does that tax factor into the income tax owed on the total amount of $120,000 (if the $50K will be taxed as ordinary income)?

Retirement, 401(k), Taxes
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August 2017

Congratulations on your retirement and even more so that you have a pension, social security and 401(k).

Your analysis is on the right track, we just need to do some adjusting to get the numbers in line.  The adjustments are based on you are a single filer for tax purposes and the pension is fully taxable.  Regarding Social Security benefits, no one pays taxes on more than 85% of their Social Security benefits.[1]  Referencing SSA.gov, it appears your Social Security income is taxable up to 85%, making the amount included in gross income = $26,350. 

The income tax brackets are based on taxable income.  Perhaps try a tax calculator such as: http://www.calcxml.com/calculators/federal-income-tax-calculator?skn=#results.  Using the pension of $39,000 and social security of $26,350, single filer and standard deductions, your taxable income is just under $55,000, with taxes due of about $9,500.  This is in the 25% marginal tax bracket.

Now that we know your current taxable income, any additional taxable income up to $91,150 will be taxed at the 25% rate.  To avoid escalation into the higher rate, 28%, one could take an additional $36,000 of income.

Using the Social Security exclusion and standard deductions resulted in the taxable income to be $55,000, not the $70,000 as originally expected.  If you were to take all $50,000 from your 401(k), only $15,000 would be taxed at the next margin rate (28%).  The additional 3% on $15,000 is $450.

When filing your income taxes, the taxes withheld by your 401(k) administrator will be shown as taxes already paid.  This will result in taxes due being less that the total tax.  If your 401(k) withdrawal is $50,000; the plan administrator withheld $5,000 and forwarded to the IRS.  The tax calculator shows with your pension, taxable Social Security and $50,000 withdrawal from your 401(k), tax liability to be $22,368.  The plan administrator withholding $5,000 or 10% would make the tax needing to be paid be $17,368.

Hope this helps in your planning!


[1] https://www.ssa.gov/planners/taxes.html

August 2017
August 2017
August 2017
August 2017