Can withdrawals from retirement accounts put you into a higher tax bracket? That depends on the type of account and the size of your withdrawals.

Key Takeaways

  • Whether your retirement withdrawals will put you into a higher marginal tax bracket will depend on the type of retirement account and how much you withdraw from it.
  • Income from traditional IRA and 401(k) accounts is taxable, while income from Roth accounts generally isn't.
  • Remember that the additional income from your retirement accounts may be taxed at a higher rate, but that won't change the rates at which your other income is taxed.

Traditional Accounts

Traditional IRA and 401(k) accounts are funded with pretax dollars. That means you defer paying taxes on the income you contribute to them until a later date, typically after you retire. Your earnings in the account also grow on a tax-deferred basis. When you begin to make withdrawals, those amounts must be included in your taxable income for the year. So, when added to your other retirement income, they may push you into a higher marginal tax bracket.

Roth Accounts

Roth IRA and 401(k) accounts, by contrast, are funded with after-tax dollars. So the money you withdraw from them—both your initial contributions and investment earnings—will be tax-free in retirement, as long as you meet a couple of conditions.

While you can withdraw your contributions from a Roth-type account at any time, with no tax implications, your investment earnings will only be tax-free if you are at least 59½ years old and have held the account for at least five years before your first withdrawal. Otherwise, any investment earnings you withdraw will be added to your income for the year and taxed at your normal income tax rate. You may also incur an additional 10% penalty.

Tax Brackets for 2020 and 2021

Even if you have to pay taxes on your retirement account withdrawals, they may not force you into a higher marginal tax bracket. That depends on what bracket you're already in and how much those withdrawals will add to your income.

Here, for example, are the rates at which each range of income is taxed for 2020.

Tax Brackets for 2020
Brackets Single or Married Filing Separately Married Filing Jointly
10% $9,875 or less $19,750 or less
12% Income over $9,875 Income over $19,750
22% Income over $40,125 Income over $80,250
24% Income over $85,525 Income over $171,050
32% Income over $163,300 Income over $326,600
35% Income over $207,350 Income over $414,700
37% Income over $518,400 Income over $622,050

Say, for example, you're single and your other income adds up to $40,000. Your highest marginal tax bracket in that case is 12%. But any additional income (such as from retirement account withdrawals) that pushes you over the threshold of $40,125 would be taxed at the next marginal tax rate, or 22%. Because of the way marginal tax brackets work, the tax rates on your first $40,125 wouldn't be affected, just anything above that.

For 2021, the percentage rates remain the same, but the threshold amounts are slightly higher.

Tax Brackets for 2021
Brackets  Single or Married Filing Separately Married Filing Jointly
10% $9,950 or less $19,900 or less
12% Income over $9,950  Income over $19,900
22% Income  over $40,525 Income over $81,050
24% Income over $86,375  Income over $172,750
32% Income over $164,925  Income over $329,850
35% Income over $209,425  Income over $418,850 
37% Income  over $523,600  Income over $628,300 

If you have both traditional and Roth accounts, and don't want to pay any more tax than you have to, consider limiting your traditional account withdrawals so that they won't be taxed at a higher marginal rate, then supplement that income as needed with tax-free withdrawals from your Roth accounts.

However, bear in mind that you may not have total control over that once you reach the age when your traditional accounts are subject to required minimum distributions, or RMDs.