Retirement withdrawal taxes in 2025 and how to pay less

Retirement withdrawal taxes represent one of the biggest drains on savings for retirees who spent decades building their nest eggs. Every dollar pulled from a Traditional 401k or traditional IRA is taxed as ordinary income. Without careful planning, these withdrawals can push you into a higher federal tax bracket and trigger costly Medicare surcharges.

The good news is that proven strategies exist to help you pay less on retirement withdrawals in 2025. Whether you are already retired or preparing for retirement, strategies such as strategic withdrawal sequencing, Roth conversions, and qualified charitable distributions can significantly reduce your retirement tax burden. A qualified Roth 401k distribution, for example, comes out completely tax-free when the five-year rule and age requirements are met.

This guide walks through each major strategy to help you keep more of your retirement savings.

How are retirement withdrawals taxed in 2025

The tax treatment of retirement account withdrawals depends on the type of account from which you take distributions. Traditional pre-tax accounts funded with tax-deductible contributions are taxed as ordinary income upon withdrawal, meaning every dollar distributed adds directly to your taxable income for the year.

For the 2025 tax year, federal income tax brackets range from 10% to 37%, and the bracket your withdrawal falls into depends on your total taxable income from all sources. A retiree withdrawing $80,000 from a traditional IRA who also receives $25,000 in Social Security benefits may find a portion of those distributions taxed at the 22% or even 24% federal rate. However, the One Big Beautiful Bill Act introduced a new $6,000 senior bonus deduction for taxpayers aged 65 and older that stacks on top of the OBBBA-increased standard deduction of $31,500 for joint filers, shielding more retirement withdrawal income from taxation in 2025 through 2028.

The three primary tax categories for retirement accounts are as follows:

• Fully taxable withdrawals from traditional IRAs, Traditional 401k plans, 403(b) plans, and SEP IRAs funded with pre-tax contributions
• Tax-free qualified withdrawals from Roth IRAs and Roth 401k plans where contributions were made with after-tax dollars and the five-year holding period has been satisfied.
• Partially taxable withdrawals from accounts containing both pre-tax and after-tax contributions, such as nondeductible traditional IRA contributions subject to pro-rata rules

State income taxes add another layer of complexity. While states like Florida, Texas, and Nevada impose no state income tax on retirement withdrawals, residents of states like California or New York may face combined federal and state tax rates exceeding 45% on large distributions. Understanding your State Tax Deadlines and filing requirements is critical for accurate tax planning.

What is the best withdrawal order to pay less tax

The order in which you draw from different retirement accounts has a profound impact on your lifetime tax burden. Strategic sequencing allows retirees to control the amount of taxable income they generate and remain in lower tax brackets.

A common and effective approach is to draw first from taxable brokerage accounts during the early years of retirement. These accounts benefit from favorable long-term capital gains rates, which top out at 20% for the highest earners compared to ordinary income rates of up to 37%. During these years, you can simultaneously execute Roth conversions from traditional accounts at potentially lower rates before required minimum distributions begin at age 73.

The general withdrawal sequencing framework includes:

1. Draw from taxable brokerage and savings accounts first to allow tax-deferred accounts to continue growing
2. Use Roth accounts strategically in years when additional income would push you into a higher bracket
3. Delay traditional account withdrawals as long as possible to maximize tax-deferred compounding
4. Coordinate Social Security claiming with withdrawal timing to minimize the taxation of benefits

Tax loss harvesting within taxable accounts can further reduce your tax liability by offsetting realized gains with investment losses. This strategy works particularly well alongside retirement withdrawals because the harvested losses can offset other income sources, keeping your overall tax rate lower.

Each year should be evaluated individually, as life events such as the sale of a home or changes in health expenses can dramatically alter the optimal withdrawal mix.

How Roth conversions reduce future retirement taxes

Converting funds from a traditional IRA or 401k into a Roth account is one of the most powerful strategies for reducing future retirement withdrawal taxes. You pay ordinary income tax on the converted amount in the year of conversion, but all future growth and qualified withdrawals from the Roth account are completely tax-free.

The ideal time for Roth conversions is during years when your taxable income is lower than usual, such as early retirement years before Social Security benefits and required minimum distributions begin. Converting just enough each year to "fill up" a lower tax bracket allows you to systematically shift assets from taxable accounts to tax-free Roth accounts without triggering unnecessarily high tax rates.

Consider a married couple filing jointly with $90,000 in gross retirement income for 2025. After applying the OBBBA-increased standard deduction of $31,500, their taxable income drops to $58,500. The 22% bracket begins at $96,951 for married filing jointly filers, meaning they could convert approximately $38,000 from a traditional IRA to a Roth IRA while remaining entirely within the 12% bracket. Over five to ten years, this approach can move hundreds of thousands of dollars into tax-free territory.

Key considerations for Roth conversions include:

• The five-year rule requires each conversion to remain in the Roth account for five years before earnings can be withdrawn tax-free and penalty-free
• Converted amounts increase your adjusted gross income, which can affect Medicare premiums through IRMAA surcharges with a two-year lookback period.
• Pay conversion taxes from non-retirement funds whenever possible to maximize the amount growing tax-free inside the Roth account.
• State income taxes apply to conversions in most states, so factoring in your 2026 California State Tax Deadlines or your respective state's requirements.

The Roth 401k strategy also applies to those still working, as contributing directly to a Roth 401k during high-earning years builds a tax-free withdrawal base without requiring a separate conversion step.

How to manage required minimum distributions wisely

Once you reach age 73, the IRS requires you to begin taking minimum distributions from traditional retirement accounts each year. These required minimum distributions are calculated based on your account balance and life expectancy factor, and they are taxed as ordinary income regardless of whether you need the funds.

For 2025, the IRS life expectancy tables determine the divisor used to calculate each year's RMD. A 73-year-old with $1 million in a traditional IRA would face an RMD of approximately $37,736, which would be added to their taxable income for the year. As account balances grow and divisors shrink with age, RMD amounts typically increase over time, potentially pushing retirees into higher tax brackets. For detailed guidance on IRA distribution rules, refer to IRS Publication 590-B, Distributions from IRAs.

Several strategies can help manage the tax impact of required minimum distributions:

1. Begin taking voluntary distributions before age 73 to draw down account balances and reduce future RMDs
2. Execute Roth conversions in the years before RMDs begin to remove assets from the traditional account permanently
3. Use qualified charitable distributions to satisfy up to $108,000 of your RMD tax-free
4. Consider the timing of other income sources around RMD obligations to avoid bracket creep

The Traditional 401k plan allows participants who are still working past age 73 to delay RMDs from their current employer's plan, though this exception does not apply to former employer plans or IRAs.

Failure to take the full RMD by the annual deadline results in a 25% excise tax on the amount not withdrawn, reduced to 10% if corrected within the IRS correction window. Taxpayers who miss an RMD must file Form 5329 with their tax return to report and resolve the shortfall.

How QCDs eliminate taxes on retirement withdrawals

Qualified charitable distributions are among the most tax-efficient strategies available to retirees aged 70½ and older. A QCD allows you to transfer up to $108,000 per year directly from your IRA to a qualifying charity, and the distributed amount is excluded entirely from your taxable income.

The tax advantage of a QCD compared to a standard charitable deduction is significant. When you take a normal IRA distribution and then donate to charity, the withdrawal increases your adjusted gross income even if you claim a charitable deduction. This higher AGI can trigger Medicare IRMAA surcharges, increase the taxable portion of Social Security benefits, and reduce eligibility for other tax benefits. A QCD avoids these cascading effects because the distribution never appears as income. For further details on IRA contribution and distribution rules, see IRS Publication 590-A, Contributions to IRAs.

QCDs also count toward satisfying your required minimum distribution for the year. A retiree with a $40,000 RMD who directs $25,000 to charity through QCDs only needs to withdraw $15,000 as taxable income to meet the distribution requirement.

To qualify, the distribution must meet several requirements:

• The account holder must be age 70½ or older at the time of the distribution
• Funds must transfer directly from the IRA custodian to the qualifying 501(c)(3) charity
• Donor-advised funds and private foundations do not qualify as recipients

The Health savings account provides another tax-advantaged approach for retirees managing healthcare costs. After age 65, HSA withdrawals for qualified medical expenses remain completely tax-free, while withdrawals for any other purpose are taxed as ordinary income without penalty. For more on HSA rules and tax-favored health plans, consult IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Does Social Security timing affect withdrawal taxes

The timing of Social Security benefits has a direct impact on retirement withdrawal tax planning because up to 85% of Social Security income can become taxable depending on your combined income level. Combined income is calculated by adding your adjusted gross income, nontaxable interest, and half of your Social Security benefits. For a complete breakdown of how benefits are taxed, refer to IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

For married couples filing jointly in 2025, Social Security benefits begin to become taxable when combined income exceeds $32,000, and up to 85% of benefits are taxable above $44,000. Single filers face thresholds of $25,000 and $34,000, respectively.

Delaying Social Security benefits until age 70 increases your monthly benefit by approximately 8% per year beyond full retirement age, creating a window of lower-income years ideal for Roth conversions and strategic Traditional 401k withdrawals before RMDs begin.

More ways to reduce retirement withdrawal taxes

Beyond the core approaches of withdrawal sequencing, Roth conversions, and charitable giving, several supplementary strategies can further reduce your retirement tax burden.

The Sell your home exclusion allows individuals to exclude up to $250,000 in capital gains ($500,000 for married couples) from the sale of a primary residence, provided ownership and use tests are met. Timing a home sale during a year with lower retirement withdrawals can minimize the overall tax impact. For full details on qualifying for this exclusion, see IRS Publication 523, Selling Your Home.

For retirees with investment portfolios, Tax loss harvesting remains a powerful tool to offset capital gains and reduce taxable income by up to $3,000 annually against ordinary income with unlimited loss carryforwards.

The Oil and gas deduction offers another avenue for high-net-worth retirees seeking to offset taxable retirement income, as intangible drilling costs can often be deducted in the year incurred. Retirees who continue part-time consulting or self-employment may also benefit from a Health reimbursement arrangement to cover medical expenses on a pre-tax basis. Additional guidance for retirees navigating tax rules can be found in IRS Publication 554, Tax Guide for Seniors.

Start paying less on your retirement withdrawal taxes today

Planning for retirement withdrawal taxes allows you to preserve more of the savings you have worked a lifetime to accumulate. Even retirees already taking distributions can benefit from optimizing their approach to withdrawals, conversions, and charitable giving.

Instead's comprehensive tax platform helps individuals identify and implement retirement withdrawal strategies that minimize tax liability while maximizing income. Instead's intelligent system analyzes your complete financial picture to recommend the optimal withdrawal sequencing, Roth conversion amounts, and charitable distribution timing for your specific situation.

From tracking multiple account types to modeling future tax scenarios, Instead provides the tax savings tools you need to make confident decisions. Comprehensive tax reporting ensures every deduction and strategy is properly documented, and flexible pricing plans make professional-grade retirement tax planning accessible to everyone.

Frequently asked questions

Q: What is the federal tax rate on Traditional 401k withdrawals in 2025?

A: Traditional 401k withdrawals are taxed as ordinary income at your marginal federal rate, which ranges from 10% to 37% for the 2025 tax year. The exact rate depends on your total taxable income from all sources, including the withdrawal itself, Social Security benefits, pensions, and investment income.

Q: Can I avoid taxes entirely on retirement withdrawals?

A: Qualified withdrawals from Roth IRAs and Roth 401k accounts are completely tax-free at the federal level, provided the account has been open for at least five years and you are 59 ½ or older. Qualified charitable distributions from traditional IRAs are also excluded from taxable income for individuals aged 70½ and older.

Q: How much can I withdraw from my retirement accounts without paying taxes in 2025?

A: The amount you can withdraw tax-free depends on your total income, deductions, and filing status. For 2025, the OBBBA raised the standard deduction to $31,500 for married couples filing jointly and $15,750 for single filers. Retirees aged 65 and older also qualify for the new $6,000 senior bonus deduction per person, which stacks on top of the standard deduction and phases out at $75,000 for single filers and $150,000 for joint filers.

Q: What happens if I miss a required minimum distribution deadline?

A: Missing an RMD deadline triggers a 25% excise tax on the amount that should have been distributed. However, if you correct the shortfall within the IRS correction window, the penalty is reduced to 10%. Filing Form 5329 with your tax return and taking the missed distribution as soon as possible is essential to resolving the issue.

Q: How do Roth conversions affect my Medicare premiums?

A: Roth conversions increase your adjusted gross income in the year of conversion, which can trigger IRMAA surcharges on Medicare Part B and Part D premiums two years later. Planning conversion amounts carefully around IRMAA thresholds helps minimize this impact.

Q: Should I take Social Security early and delay retirement account withdrawals?

A: The optimal approach depends on your specific financial situation. Delaying Social Security until age 70 maximizes monthly benefits and creates a window for tax-efficient Roth conversions. However, claiming early may make sense if you have health concerns or immediate income needs.