How to Avoid Tax on Retirement Withdrawals

Getting money from retirement accounts can come with strings attached: Income tax, early withdrawal penalties, and tax withholding may leave you with less than you hoped.

So, how do you avoid taxes on 401(k) withdrawals and other accounts? In some cases, you just have to pay. But sometimes, there are several opportunities to get 401(k) money without paying taxes—or at least manage the taxes so you have the resources you need.

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With a low enough income, you may pay at surprisingly low rates. But that’s not always feasible, especially if you withdraw a substantial amount. You can also try taking loans or Roth distributions, when available, if you need to avoid raising your taxable income. But there are always pros and cons—you might not want to wipe out your Roth assets, and loans can be problematic in several different ways. And with Roth, you start with after-tax money, so it's not like you're completely dodging taxation.

There’s also the question of mandatory tax withholding. What if you need all of that money, and you expect to pay taxes at a lower rate? You may be able to avoid tax withholding in some cases.

Of course, whether or not you pay tax today may ignore the big picture. Getting money out of a pre-tax retirement account without paying taxes could cost more later. For example, it’s possible that you’ll owe underpayment penalties.

What’s more, you’ve got the rest of your life to think of. Whenever possible, think of how these withdrawals might fit with a well-designed retirement income strategy. Is it better to pull from traditional or Roth, or is it just best to leave retirement funds untouched. You won’t always have the luxury of picking and choosing (especially when life happens), but it’s always best to consider your long-term plan.

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CHAPTERS
0:00 How to Get 401k Money Without Paying Tax
0:31 Low Income Tax Brackets
1:57 Roth Distributions and Earnings
3:28 401(k) Loans and Taxation
4:23 Mandatory Tax Withholding
6:17 Avoiding Early Withdrawal Penalties
8:45 Qualified Charitable Distributions (QCDs)

Remember that it’s critical to review your situation with your own tax, legal, and financial experts before making any decisions, taking withdrawals, or filing a return. Your reality might be significantly different from what this video describes, so you need to triple-check everything.

IMPORTANT:
It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.

[brentncindy]

If the person is not yet 59 1/2....but at least 55 in the calendar year they stop working (Laid off, fired, retired....etc) they can withdraw from their 401K without paying that 10% penalty

[aileencapra]

Thank You. Very informative. I just subscribed. Which is less tax penalty taking hardship distribution to buy my new house in another country or just leave my job? Im only 50 yrs old. Would I be subject to 30% tax on hardship withdrawal or just 10%?

[PH-dmew]

I have been told that if you are taking a distribution on a monthly basis ( over 59.5) you can pay less than the 20% set rate, if the distribution would last for longer than 10 years. Is that standard or just certain plans? Is that incorrect information?

[blackbeardpapa]

great stuff as always. Give us some food for thought on Solo401k taxes, when taken out?

[paulhenry]

I qualify for the "rule of 55" after a separation with my employer this year, but what will the box 7 code be on my 1099-R to ensure that I won't need to report a 10% penalty. Do I need to contact my 401K plan account rep? I'm assuming a #2 code is what I want. Thanks for the videos, these are so helpful!

[ADRENIXYT]

What happens if you make more than the contribution limits and you put money in your ROTH IRA without knowing you would make it?

[vandalorian]

Let’s say I collect 33k from SS and I withdraw $8k from my SEP can I assume no tax is due? I don’t trigger the SS TAX threshold and $8k is below the personal deduction. My goal it to maximize my deduction without paying any taxes

[johnkenney]

What was that calculator you were using?