How Retirement Account Withdrawals Affect Your Tax Bracket

How you withdraw money from retirement accounts can affect the amount of tax you owe. Withdrawals can count as income, capital gains, or be tax-free, depending on the account. The more you withdraw in taxable income, the higher your tax bracket may be. Planning these withdrawals can help manage your tax bill in retirement.

If you need help planning your withdrawals, a financial advisor can help you develop a retirement strategy.

Categories of Taxes That Retirement Accounts Can Trigger

One of the most important things to consider when planning your retirement is your taxes. And Graham Ortmann, a CPA with financial education company Zogo, told SmartAsset in an interview that in addition to one-off events like selling your house or moving, you will need to know if and when you have to pay taxes on your retirement plans.

“Withdrawals from different types of retirement accounts can also impact your taxable income,” he said. “For instance, qualified Roth withdrawals are not taxable, while withdrawals from traditional 401(k) funds or IRAs would be.”

Overall, there are three categories of retirement withdrawal you can take:

1. Untaxed

Roth-style accounts, such as a Roth IRA or a Roth 401(k), are known as post-tax retirement accounts. You pay taxes on the money you deposit, receiving no benefit during your working years. Then, in retirement, you can withdraw this money tax-free, meaning that you pay nothing for the portfolio’s gains.

It’s usually a good idea to maximize your post-tax accounts first as part of retirement planning, as this saves most people far more money than a pre-tax account.

Taking money from an untaxed account will not change your tax status. This money does not contribute toward your taxable income for the year, and so will not affect the tax bracket of any other withdrawals or income.

2. Ordinary Income

Withdrawals from pre-tax retirement plans, such as 401(k) and IRA accounts, are taxed as ordinary income. This rule applies even if you take withdrawals based on the sale of stocks or other assets that would ordinarily constitute capital gains. This money is applied to your taxable income for the year and will affect your income tax bracket.

3. Capital Gains

Most, if not all, tax-advantaged retirement accounts do not trigger capital gains taxes. Instead, withdrawals are treated as either ordinary income (if made from a pre-tax account) or untaxed income (if made from a post-tax account).

However, withdrawals from a standard portfolio with no specialized tax advantages may trigger capital gains based on the nature of your returns. Typically, actions such as selling stocks or bonds from a standard portfolio will apply to your capital gains tax bracket for the year.

Withdrawals Determine Your Taxable Income

A retired woman prepares to withdraw from her retirement account.

“To best plan for your tax situation, think about your expected sources of income and deductions and whether you expect to be in a higher or lower bracket than you are now,” said Ortmann. “If you’ll be in a higher bracket, consider investments and accounts that offer tax-free or tax-advantaged withdrawals. If you’ll be in a lower tax bracket, you may want to consider investments and accounts that can lower your tax liability in the present.”

Your tax bracket in retirement works, in one sense, the same as it does during your working life. The more money you withdraw from a pre-tax retirement account, the higher your income will be and the higher your income tax bracket. The more capital gains you generate from a non-advantaged investment portfolio, the higher your capital gains tax bracket.

Specific Tax Implications of Withdrawals

Here are four important considerations to take into account regarding the tax consequences of various types of income as well as capital gains:

Social Security

Social Security benefits may be taxed depending on how much income you have from other sources. If your total income is low, your benefits won’t be taxed. If it’s higher, part of your benefits may be added to your taxable income.

Here are the federal income thresholds that affect how much of your benefits may be taxed:

If you’re single and your income is $25,000 or less—or married filing jointly with $32,000 or less—your benefits aren’t taxed.
If your income is a bit higher, up to $34,000 (single) or $44,000 (joint), then up to half your benefits may be taxed.
If your income goes over $34,000 (single) or $44,000 (joint), up to 85% may be taxable.
If you’re married, file separately, and lived with your spouse during the year, up to 85% may be taxed no matter how much you earn.

Combined income includes your adjusted gross income, tax-exempt interest, and half of your Social Security benefits.

Some states also tax Social Security benefits, using their own rules.

Tax-advantaged retirement accounts

You can disregard any withdrawals that you make from a post-tax account, such as a Roth IRA or a Roth 401(k). Since these accounts generate untaxed earnings, withdrawals do not increase your taxable income for the year.

You would apply any withdrawals that you make from a pre-tax account, such as a 401(k) or an IRA. The IRS considers this money ordinary income. You add this to your taxable Social Security benefits for the year as part of your overall taxable earnings.

For example, say you withdraw $50,000 from your 401(k) for the year. You also have $17,850 in taxable Social Security benefits. Your taxable earnings are now $67,850 which, in 2025, would put you in the 22% tax bracket.

Taxable income

Finally, add any other sources of taxable income for the year, such as money you earned from work or non-tax-advantaged portfolio earnings that count as income. The final total is your overall earnings for the year and will determine your tax bracket.

For example, say that you rent out a room on Airbnb that generates $5,000 per year in additional income. You would add this to your Social Security benefits and portfolio withdrawals for a total taxable earnings of $72,850. This would still keep you in the 22% tax bracket.

Capital Gains

Capital gains taxes apply when you sell investments like stocks, bonds, or funds from a regular brokerage account. If you’ve held the investment for more than one year, the profit is usually taxed at a lower rate. This tax is separate from your regular income tax.

Strategies for Sequencing Withdrawals

Your retirement withdrawal strategy can make as much difference as the amount you take out, particularly how you sequence your withdrawals. Sequencing means deciding which accounts to draw from first, second, and last. Since different accounts are taxed differently, the order you choose will determine how much taxable income you create each year and how long your retirement savings will last.

A common approach is to start with taxable accounts. Selling investments in a brokerage account may trigger capital gains, but long-term capital gains are often taxed at lower rates than ordinary income. Drawing from these accounts first also gives pre-tax and Roth accounts more time to grow.

After that, many retirees move to pre-tax accounts like traditional 401(k)s or IRAs. Withdrawals here are treated as ordinary income, and they eventually must be taken due to required minimum distributions (RMDs). Finally, Roth accounts are often used last. Since qualified withdrawals are tax-free, Roth savings can be reserved for years when you want to avoid bumping into a higher bracket or can be passed on to heirs with no immediate tax burden.

Sequencing also allows for strategic adjustments. If you expect to be in a low tax bracket early in retirement, it might make sense to take more from pre-tax accounts then, reducing the size of future RMDs. On the other hand, if you are close to the threshold where Social Security benefits become taxable, you might lean on Roth withdrawals for a period to keep your taxable income down. The mix depends on your other income, spending needs and long-term estate planning goals.

In short, sequencing withdrawals is about more than just funding your lifestyle. It is a way to manage annual tax exposure, reduce future required distributions and stretch your retirement savings further. Taking the time to plan the order of withdrawals can have a long-term impact on both your tax bill and the sustainability of your portfolio.

Bottom Line

An older woman studies her tax-advantaged accounts.

If you withdraw money from a pre-tax retirement account, such as a 401(k) or an IRA, those withdrawals will apply to your income tax bracket for the year. Taking money from a post-tax account, such as a Roth IRA or a Roth 401(k), will not increase your taxable income and so will not apply to your income tax bracket. By managing how much money you withdraw, and from which account, you can manage your taxes on an annual basis.

Retirement Tax Planning Tips

A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Planning for taxes doesn’t stop in retirement. In fact, it’s very important to have an effective strategy for making your withdrawals tax-efficient.