Do I Pay Taxes on 401(k) Withdrawals After Age 60? The Complete Guide

The money you take out of a traditional 401(k) after age 60 will still be taxed. If you reach age 59 1/2, you will not have to pay income taxes, but you will not have to pay the 2010 early withdrawal penalty. But if you’re over 59½ and have had a Roth 401(k) account for at least 5 years, you can take money out tax-free.

Let’s dive deeper into what you need to know about 401(k) taxation in your 60s.

Traditional vs. Roth 401(k): The Tax Difference

The type of 401(k) you have makes all the difference when it comes to taxes

Traditional 401(k):

• Funded with pre-tax dollars
• Contributions reduced your taxable income when made
• All withdrawals taxed as ordinary income (federal + applicable state taxes)
• No special “senior tax rate” – taxed like regular income

Roth 401(k)

• Funded with after-tax dollars
• No tax break when contributions were made
• Qualified withdrawals completely tax-free (if over 59½ and account open 5+ years)
• Both contributions AND earnings come out tax-free

Federal Tax Rules for 401(k) Withdrawals After 60

For Traditional 401(k)s

When you take money from a traditional 401(k) after age 60:

1. The entire withdrawal is added to your taxable income for the year
2. It’s taxed at your ordinary income tax rate
3. Your tax rate depends on your total income (including the withdrawal)
4. No 10% early withdrawal penalty applies

For example, if you withdraw $30,000 from your traditional 401(k) at age 60, that $30,000 gets added to any other income you have for the year. If your total taxable income (after deductions) puts you in the 22% tax bracket, you’d pay about 22% in federal tax on that withdrawal.

For Roth 401(k)s

If you withdraw from a Roth 401(k) after age 60

1. If your account has been open 5+ years: completely tax-free
2. If your account is less than 5 years old: only your contributions come out tax-free (earnings are taxable)
3. No 10% early withdrawal penalty either way

You take out $30,000 from your Roth 401(k) when you turn 60. The account has been open for 7 years. You’d pay $0 in federal tax on that withdrawal.

State Taxes on 401(k) Withdrawals

Where you live makes a big difference! Here’s how states handle 401(k) withdrawals:

States with no income tax (pay $0 in state taxes on 401(k) withdrawals):

• Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire

States that exempt retirement income (including 401(k)s):

• Illinois, Mississippi, Pennsylvania, Iowa

States with partial exemptions:

• New York: Exempts up to $20,000 per person of retirement income
• Georgia: Exempts up to $65,000 per person over age 65 ($35k for ages 62-64)
• South Carolina: Excludes $15,000 of retirement income for those 65+
• Kentucky: Exempts up to $31,110 of retirement income per person

States that fully tax 401(k) withdrawals:

• California, Oregon, Virginia, and most others not mentioned above

Common Scenarios: How Taxes Work in Real Life

Scenario 1: Retired at 60 with Traditional 401(k)

John retires at 60 and withdraws $30,000 from his traditional 401(k). He has no other income.

• Federal tax: After the standard deduction, he’ll pay 10-12% on the taxable portion
• State tax: Depends on his state (tax-free in FL, fully taxed in CA)
• No penalty: He’s over 59½, so no 10% penalty applies

Scenario 2: Retired at 60 with Roth 401(k)

Susan retires at 60 and withdraws $30,000 from her 10-year-old Roth 401(k).

• Federal tax: $0 (completely tax-free)
• State tax: $0 in most states (follows federal treatment)
• No penalty: She’s over 59½, so no penalty applies

Scenario 3: Working at 60, Needs Extra Cash

Mike is still working at age 61 but wants $10,000 from his 401(k) to pay off debt.

• Plan rules: Must check if his plan allows in-service withdrawals (many do after 59½)
• Federal tax: The $10,000 adds to his current income, potentially pushing him into a higher tax bracket
• State tax: Will pay state income tax in most states
• Tax impact: Taking this money while working means it’s taxed at his highest marginal rate

Scenario 4: Lump Sum vs. Spreading Out Withdrawals

Alice has $500,000 in her 401(k) at age 60 and considers her options:

Option 1: Take the entire $500,000 at once

• Gets pushed into highest tax brackets (up to 37% federal)
• Could lose over a third to taxes
• State taxes would also apply

Option 2: Take $50,000 annually for 10 years

• Stays in lower tax brackets each year
• Remaining funds continue growing tax-deferred
• Pays significantly less in total taxes

Strategic Ways to Manage 401(k) Taxes

You can’t avoid taxes on traditional 401(k) withdrawals, but you can manage them:

1. Withdraw strategically: Take only what keeps you in lower tax brackets
2. Consider location: Moving to a tax-friendly state can save thousands
3. Mix income sources: Combine 401(k) withdrawals with Roth distributions or taxable account withdrawals
4. Watch thresholds: Be mindful of income thresholds for Social Security taxation and Medicare premiums
5. Roth conversions: Consider converting portions of traditional 401(k) to Roth during low-income years

Required Minimum Distributions (RMDs)

That’s right—the IRS wants you to take money out of your traditional 401(k) starting at:

• Age 73 for those born in 1951 or later
• Age 72 if you turned 72 before 2023

RMDs are calculated based on your account balance and life expectancy tables. Failing to take RMDs results in penalties (25% of the amount not taken, reduced to 10% if corrected promptly).

Note: As of 2024, Roth 401(k)s no longer have RMDs!

Special Case: The Rule of 55

Taking money out of your employer’s 401(k) before age 59½ is tax-free if you quit your job after age 55. This can be useful if you retire early. However:

• Only works for the 401(k) from the employer you left at 55+
• Doesn’t apply if you roll the money to an IRA
• You still pay income tax on withdrawals

Common Mistakes to Avoid

❌ Assuming “penalty-free” means “tax-free”: Traditional 401(k) withdrawals are always taxable income, even after 59½.

❌ Taking huge lump sums: This can push you into higher tax brackets, potentially doubling your tax rate.

❌ Forgetting state taxes: Some states tax retirement distributions heavily – research your state’s rules.

❌ Missing the Roth 5-year rule: Even if you’re over 59½, a newer Roth account might still have taxable earnings.

❌ Ignoring impacts on other benefits: 401(k) withdrawals can make Social Security taxable or increase Medicare premiums.

When Should You Start Withdrawals?

The decision of when to tap your 401(k) depends on your situation:

Consider starting withdrawals at 60 if:

• You’ve retired and need income
• You want to spread out taxable distributions before RMDs force larger withdrawals
• You’re in a low tax bracket currently

Consider delaying withdrawals if:

• You’re still working with good income
• You have other assets to live on
• You expect to be in a lower tax bracket later

To answer the original question: Yes, you do pay taxes on traditional 401(k) withdrawals after age 60. While you avoid the 10% early withdrawal penalty after 59½, the money is still subject to ordinary income tax at both federal and state levels (depending on where you live).

For truly tax-free withdrawals after 60, you need a qualified Roth 401(k) or Roth IRA distribution.

The best approach is to plan ahead, understand your tax situation, and consider working with a financial advisor who can help you create a tax-efficient withdrawal strategy.

Remember, it’s not about how much you withdraw – it’s about how much you get to keep after taxes!

FAQs

Q: At what age can I withdraw from my 401(k) completely tax-free?
A: Traditional 401(k) withdrawals are never completely tax-free. Only Roth 401(k) distributions can be tax-free (if you’re over 59½ and meet the 5-year rule).

Q: How much tax will I pay on my 401(k) withdrawals?
A: It depends on your total income and tax bracket. Federal rates range from 10% to 37%, plus state taxes where applicable.

Q: Will 401(k) withdrawals affect my Social Security benefits?
A: They can make your Social Security benefits taxable if your combined income exceeds certain thresholds.

Q: Can I withdraw from my 401(k) at 60 while still working?
A: Yes, if your plan allows in-service withdrawals (many do after 59½). The withdrawal will be taxable and add to your current income.

Q: Are 401(k) withdrawals considered earned income?
A: No, they’re considered taxable income but not earned income. They don’t count toward Social Security earnings or IRA contribution eligibility.