How Can I Avoid Paying Taxes on My 401(k) Withdrawal?

A traditional 401(k) is a great way to save for retirement. That’s because you don’t pay taxes when you make contributions or when your employer makes matching contributions (if your company offers them). And you don’t owe tax on earnings as your money grows, which allows your contributions to compound more quickly. It all adds up to a lower taxable income during your working years—hopefully allowing you to save more money.

Now for the catch: Traditional 401(k) withdrawals (technically, they’re called “distributions”) in retirement are taxed as ordinary income. As a result, you’ll be hit with a tax bill when it comes time to withdraw your savings.

How much tax will I pay on a 401(k) withdrawal?

Many people think the money in their account is all theirs. That’s not true—because of the way 401(k) taxes work. Since you don’t pay taxes on your contributions (or your employer’s contributions if you get a match), your withdrawals will be taxed at your ordinary income tax rate in retirement. You’ll also have to pay taxes on any funds your employer contributed. 401(k) withdrawals are never tax-free at any age. So even if you have $1 million saved, the amount you’ll get after taxes is likely to be much less.

And if you withdraw money from your 401(k) prior to age 59½, not only will you have to pay taxes, but you’ll typically also be hit with a 10 percent penalty. (If you have a Roth 401(k), you won’t pay taxes on your withdrawals in retirement because the money you put in was already taxed—however, you can still be assessed taxes and penalties for taking out your money prior to 59½.)

How to calculate 401(k) withdrawal taxes

Any withdrawals you take from your 401(k) in retirement will be taxed at your ordinary income tax rate. To calculate your taxable income rate, you’d take your gross income (which includes any distributions from your 401(k) less any deductions. (Most people just take the standard deduction.) That number will determine which tax bracket you’re in. Your tax bracket will determine your effective tax rate and, thus, how much tax you’ll pay on your income—including distributions from your 401(k).

Can you minimize taxes on your 401(k)?

Your 401(k) withdrawals are never tax-free, and there’s no way to get out of paying the taxes. But there are some situations when you might be able to access your 401(k) money with minimal tax implications, even if temporarily. (A Roth IRA has a bit more flexibility in terms of penalty-free early withdrawals.)

• Option 1: Take out a 401(k) loan. If your company allows it, you may be able to borrow against your 401(k), and you won’t be taxed on the amount you borrow. However, if you don’t pay the loan back on time or default, you will owe taxes and possibly early-withdrawal penalties.
• Option 2: Take a distribution in retirement during a year when your income (including the distribution) falls below a household’s standard deduction.

Beyond that, if you’re planning to make regular 401(k) withdrawals in retirement, you'll have to pay taxes. But there are strategies to help you manage your tax liability once you start using the savings in your 401(k).

How to make tax-efficient 401(k) withdrawals

When it comes to being tax-efficient with your 401(k) in retirement, it’s all about the order in which you withdraw from your accounts. Here’s an example.

Let’s say you’re retired (over age 59½) and your tax status in 2025 is married filing jointly. According to 2025 tax brackets, as long as your taxable income stays below $96,950, you’ll remain in the 12 percent tax bracket—but even a dollar above that amount will be taxed at 22 percent. That’s a big jump, and the rate gets progressively higher as your taxable income increases.

Planning your 401(k) withdrawals strategically could mean that you withdraw just enough to get you to $96,949 in taxable income, so you stay below the 22 percent tax bracket. If you need more than that to live off in retirement, then you can switch to taking money from accounts where your withdrawals won’t be taxed, like a Roth account or the basis you paid into your whole life insurance (which you can typically withdraw tax-free). With this strategy, you’re minimizing the amount of tax you will owe as you draw down from your diverse retirement portfolio.

Have diverse retirement income sources

To be truly efficient with your taxes in retirement, it’s best to have a diverse mix of assets to work with—which means saving for retirement using more than just a traditional 401(k). This allows you to make strategic withdrawals in retirement that can help you lower your tax burden overall because different assets like Roth accounts, whole life insurance and even annuities work differently and get different tax treatment.

Other ways to stay in a lower tax bracket

The lower your taxable income, the lower your tax bracket will be. While you may not want to reduce the amount of total income you receive, there are additional ways to reduce your taxable income in retirement. But you have to plan ahead.

Creative strategies such as using tax-advantaged accounts like an HSA or FSA along with carefully balancing Roth distributions with traditional distributions could yield tax savings. If you’re open to working a bit longer, delaying retirement and taking a lower-paying job could also reduce your taxable income—and give your 401(k) savings even more time to grow.

Consider a Roth IRA conversion or IRA rollover

If you’re still saving for retirement, you could also consider converting a portion of your 401(k) to a Roth account. You’ll owe tax on the amount of your Roth conversion in the year that you convert, but you probably won’t owe any additional taxes during your lifetime. This can help set you up to be more tax efficient during retirement.

This could also be a time to consider transferring funds from one IRA to another, called an IRA rollover. There are a few different ways you can complete a rollover, including:

• A direct rollover. You can contact your plan administrator and have them move funds from one retirement account to another. (You might have done this when you switched jobs and rolled over your old 401(k) to the new employer).
• A 60-day rollover. Another option if you’re looking to move funds is to have the funds sent directly to you and then deposit those funds into a new retirement account within 60 days of the withdrawal.

Keep required minimum distributions (RMDs) in mind

It’s important to keep in mind that required minimum distributions (RMDs) begin at age 73. This amount is determined by dividing your previous end-of-year account balance by a life expectancy factor that’s based on your age. The IRS provides these resources to help you calculate your RMD.

Once you’re required to start RMDs, you will be required to withdraw a certain amount and pay taxes on it each year. Taking lower withdrawals in your early years could leave you with higher required minimum distributions in later years. That’s why it’s a good idea to have a well-thought-out plan to generate your income in retirement.

Consider charitable giving strategies

A qualified charitable distribution (QCD) is a strategy some people use to distribute an IRA while minimizing the impact of taxes. With a QCD, an IRA owner can give up to $108,000 (in 2025) per year directly from an IRA to qualified charities. These funds satisfy RMDs without counting toward your taxable income. If your money is in a 401(k), you could roll it over to an IRA to take advantage of this strategy.

How to control what you’ll pay in taxes overall

You might not be able to avoid paying taxes on a 401(k) withdrawal, but this is an area where a financial advisor can make a big difference. If you’re saving for retirement, your Northwestern Mutual financial advisor can help you ensure that you’re saving in a way that positions you well to take advantage of the strategies above.

If you’re about to retire, your advisor can build a tax-efficient income plan that also protects your retirement portfolio against other risks to your money. These risks include market downturns or a long lifespan. Your advisor can be your co-pilot, leaving you with more time to enjoy life.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.

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