How to Pay Less Tax on Retirement Account Withdrawals

We were recently quoted in U.S. News and World Report on April 24, 2025. The article link can be found here https://money.usnews.com/money/retirement/articles/how-to-pay-less-tax-on-retirement-account-withdrawals

Retirees can easily gain a tax break on savings if they know where to look.

Key Takeaways

• Avoid early withdrawals from retirement accounts, such as IRAs and 401(k)s, which incur tax penalties.

• Consider taking some withdrawals before age 73 to minimize future tax burdens.

• Roth IRAs offer tax-free withdrawals in retirement and avoid required minimum distributions.

• Use the 72(t) rule if you retire before age 59 1/2.

• Convert funds to a Roth IRA or Roth 401(k) plan.

The tax implications of retirement savings withdrawals can be complex, but understanding a few basic principles can help retirees avoid costly mistakes. Having a well-considered retirement withdrawal strategy can help you maximize the value of your tax-advantaged accounts.

As you enter the decumulation phase of retirement, here’s what to know about making withdrawals from your retirement savings.

Avoid the Early Withdrawal Penalty

An early withdrawal from your individual retirement account or 401(k) can trigger substantial penalties. For IRAs, if you withdraw funds before you turn 59 1/2, you’ll typically face a 10% early withdrawal penalty in addition to regular income tax.

Similarly, 401(k) withdrawals before age 59 1/2 incur the same 10% penalty plus income tax.

“There are a few exceptions, such as first-time home purchases, qualified education expenses or major medical bills, but in most cases, tapping into your retirement funds early will cost you,” said Pawan Jain, associate professor of finance at Virginia Commonwealth University in Richmond, Virginia, in an email.

Avoiding early withdrawals can benefit retirement savers in two ways. “You keep your savings growing tax-deferred longer, and you avoid the extra penalty,” Jain said.

Don’t Miss Required Minimum Distribution Deadlines

Commonly referred to as an RMD, a required minimum distribution is the minimum amount a retirement saver must withdraw from their retirement accounts, such as a traditional IRA or 401(k), starting at age 73, or 75 if born in 1960 or later.

Forgetting to take your first RMD by April 1 in the year after you turn 73 can result in a significant tax penalty. “If you skip an RMD, the penalty can be steep: a 25% excise tax on the amount you should have withdrawn, reduced to 10% if corrected promptly or potentially waived entirely if due to a reasonable error,” Jain said.

The deadline to take your first RMD is generally April 1 after you turn 73 and Dec. 31 each subsequent year. If you decide to take your first two RMDs in one year, be aware that you’re doubling the tax expenses rather than spreading them across two calendar years. Financial advisors and tax accountants are well-versed in those deadlines and can help avoid penalties.

Use the 72(t) Rule

One creative way to withdraw retirement funds while abiding by the tax code and avoiding penalties before you reach age 59 1/2 is to deploy IRS rule 72(t).

“Under this rule, you can elect to receive substantially equal periodic payments (SEPP), choosing one of the approved IRS methods for at least five years or reaching age 59 1/2, whichever is longer,” said David Freisner, CEO and wealth advisor at Konza Global Wealth Group in Overland Park, Kansas, in an email.

For example, if you retire at age 56 and begin receiving distributions under the 72(t) rule, you must continue taking distributions calculated under one of the IRS methods you elected until age 61. “At that time, you’re no longer required to continue under rule 72(t),” Freisner said.

Roth IRAs Can Help Save Taxes on Withdrawals

Roth IRAs are among the most powerful tax-saving tools in retirement. These accounts allow your retirement savings to grow tax-free, and withdrawals are not taxable if you’re 59 1/2 or older and have held the account for a minimum of five years. That’s because contributions are made with after-tax dollars. “Also, unlike traditional accounts, Roth IRAs don’t have RMDs during the original account holder’s lifetime,” Jain said.

One effective strategy many retirees overlook is converting previously funded tax-deferred funds to a Roth IRA or Roth 401(k). “If you still have years before retirement, Roth conversions – moving money from a traditional IRA to a Roth IRA or (Roth) 401(k) – can be a smart move, especially during years when your income and tax rate are lower,” Jain added. The converted amount will be taxable in the year of the conversion.

“Working with your accountant on this will be necessary to ensure that the conversions do not inadvertently move you up to the higher tax bracket. This calculation will be based on your adjusted gross income each year,” said David Rosenstrock, director at Wharton Wealth Planning in New York, in an email.

Additionally, if you’re converting part of a traditional IRA, rollover IRA, 401(k), 403(b), or SEP IRA to a Roth IRA in 2025, there’s a new rule that requires all RMDs to be taken first.

“Previously, only the RMD on the account being converted or partially converted had to be taken before a conversion,” Rosenstrock said. “Now, all RMDs across all required accounts must be withdrawn before any Roth conversion should occur. Failing to follow this sequence could result in penalties or the automatic removal of the unfulfilled RMD from the Roth IRA after conversion.”