Key Takeaways
- 13 states don’t tax retirement income: 9 have no state income tax at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), plus 4 additional states fully exempt retirement distributions (Illinois, Iowa, Mississippi, Pennsylvania)
- Federal 401k contributions increased to $23,500 for 2025 ($31,000 with catch-up for 50+, $34,750 for ages 60-63)
- Relocating to a tax-friendly state can save $2,000-$5,000+ annually on retirement withdrawals
- Proportional withdrawal strategies reduce lifetime taxes by 40%+ compared to traditional sequential approaches
- RMDs now start at age 73 (increasing to 75 in 2033), with penalties reduced from 50% to 25%
Table of Contents
- How do states tax 401k withdrawals in 2025?
- Which states don’t tax 401k withdrawals?
- What are the 2025 federal 401k limits and tax brackets?
- State-by-state comparison table
- What’s the best withdrawal strategy to minimize taxes?
- How does SECURE 2.0 affect my 401k withdrawals?
- Real-world examples with specific numbers
- FAQ: Common questions about 401k withdrawal taxes
- Sources
How do states tax 401k withdrawals in 2025?
The direct answer: Your 401k withdrawal taxes depend entirely on where you live. Traditional 401k withdrawals are always taxed as ordinary income at the federal level, but state taxation varies dramatically—from 0% in 13 states to over 13% in California. This geographic variation creates a massive opportunity for tax savings through strategic residency planning.
State taxation of 401k withdrawals represents one of the largest controllable variables in retirement planning. A retiree withdrawing $50,000 annually from their 401k faces zero state tax in Florida, Tennessee, or Wyoming, but could pay $2,000-$6,500 in states like Minnesota, California, or Hawaii. Over a 25-year retirement, that’s $50,000 to $162,500 in potential savings simply from choosing the right state.
Most states follow one of four approaches: no income tax at all, full exemption of retirement income, partial exemptions with age or income limits, or full taxation at regular rates. Understanding these differences is critical. Recent 2024-2025 legislative changes show a clear trend toward more retirement-friendly policies, with Kansas, Missouri, and Nebraska eliminating Social Security taxes and states like Michigan and Connecticut phasing out taxes on IRA distributions.
Federal law requires 20% mandatory withholding on 401k distributions, which applies regardless of your state. You’ll owe federal income tax based on the 2025 tax brackets (10% to 37%), but state taxes add another layer that varies by $0 to $6,000+ per $50,000 withdrawn.
Visual: 30-Year Tax Impact Comparison by State
Image: Financial planning documents and calculator – Photo by Markus Winkler on Unsplash
Tax Impact on $60,000 Annual 401k Withdrawal Over 30 Years:
| State Category | Annual State Tax | 30-Year Total | Lifetime Savings vs High-Tax State |
|---|---|---|---|
| No-Tax States (FL, TX, WY) | $0 | $0 | $198,000 |
| Full Exemption (IL, IA, MS, PA) | $0 | $0 | $198,000 |
| Low-Tax (3-4% rate) | $1,800-$2,400 | $54,000-$72,000 | $126,000-$144,000 |
| Medium-Tax (5-7% rate) | $3,000-$4,200 | $90,000-$126,000 | $72,000-$108,000 |
| High-Tax States (CA, NY, HI) | $4,800-$6,600 | $144,000-$198,000 | $0 (baseline) |
Key Insight: Retiring in a no-tax state versus California saves the equivalent of 3.3 years of retirement income over 30 years.
Which states don’t tax 401k withdrawals at all?
Image by Ingmar from Unsplash
States with zero income tax (9 states)
These states have no state income tax whatsoever, meaning your 401k, IRA, pension, and Social Security benefits are all completely exempt from state taxation:
- Alaska – No income tax; residents receive Permanent Fund Dividend ($1,702 in 2024)
- Florida – No income tax; popular retirement destination with warm climate
- Nevada – No income tax; no estate or inheritance taxes
- New Hampshire – Eliminated dividend/interest tax as of January 1, 2025; now has truly zero income tax
- South Dakota – No income tax; low overall tax burden
- Tennessee – No income tax; eliminated Hall Tax (investment income tax) in 2021
- Texas – No income tax, but higher property taxes ($4,111 median)
- Washington – No income tax on wages or retirement; has 7% capital gains tax on gains exceeding $270,000
- Wyoming – No income tax; lowest combined sales tax (5.56%); no estate or inheritance tax
States that fully exempt retirement income (4 additional states)
These states have income taxes but completely exempt 401k, IRA, and pension distributions:
- Illinois – 4.95% flat tax on other income; all retirement income exempt including 401k, IRA, pensions, and Social Security
- Iowa – 3.8% flat tax; retirement income fully exempt for residents age 55+ (changed in 2023)
- Mississippi – 4.4% flat tax (dropping to 4% in 2026); all qualified retirement income exempt; lowest median property tax ($1,189)
- Pennsylvania – 3.07% flat tax on other income; retirement distributions fully exempt for age 59½+
Total: 13 states offer complete exemption from state taxes on 401k withdrawals.
According to Kiplinger’s 2025 analysis, Mississippi ranks as the most tax-friendly state overall for retirees, combining zero retirement income tax with the nation’s lowest property taxes.
What are the 2025 federal 401k limits and tax brackets?
2025 401k and IRA contribution limits
401k/403b Contribution Limits (IRS Notice 2024-80):
- Base limit: $23,500 (increased $500 from 2024)
- Catch-up (ages 50-59): $7,500
- Enhanced catch-up (ages 60-63): $11,250 (new SECURE 2.0 provision)
- Total with catch-up (50-59): $31,000
- Total with super catch-up (60-63): $34,750
- Overall limit (including employer): $70,000
IRA Contribution Limits (IRS Notice 2024-80):
- Base limit: $7,000 (unchanged from 2024)
- Catch-up (age 50+): $1,000
- Total for age 50+: $8,000
2025 federal income tax brackets
Single Filers (IRS Revenue Procedure 2024-40):
- 10%: $0 – $11,925
- 12%: $11,926 – $48,475
- 22%: $48,476 – $103,350
- 24%: $103,351 – $197,300
- 32%: $197,301 – $250,525
- 35%: $250,526 – $626,350
- 37%: Over $626,350
Married Filing Jointly:
- 10%: $0 – $23,850
- 12%: $23,851 – $96,950
- 22%: $96,951 – $206,700
- 24%: $206,701 – $394,600
- 32%: $394,601 – $501,050
- 35%: $501,051 – $751,600
- 37%: Over $751,600
Standard Deduction 2025:
- Single: $15,000 (up $400)
- Married filing jointly: $30,000 (up $800)
- Head of household: $22,500 (up $600)
- Additional for age 65+: $2,000 (single), $1,600 (married, per person)
Key 2025 retirement figures
Social Security (SSA.gov):
- COLA increase: 2.5%
- Maximum taxable earnings: $176,100
- Maximum monthly benefit (age 67): $4,043
- Maximum monthly benefit (age 70): $5,108
Medicare Part B (Medicare.gov):
- Standard monthly premium: $185 (up from $174.70)
- Annual deductible: $257 (up from $240)
- IRMAA surcharges begin at: $106,000 (single), $212,000 (joint)
Required Minimum Distributions (IRS.gov):
- RMD age: 73 (for those born 1951-1959)
- Future RMD age: 75 (starting 2033, for those born 1960+)
- RMD penalty: 25% of shortfall (reduced from 50%)
- Corrected penalty: 10% if fixed within 2 years
Complete state-by-state 401k withdrawal tax comparison
States with NO income tax (9 states)
| State | 401k Tax Rate | Social Security Tax | Median Property Tax | Sales Tax | Notes |
|---|---|---|---|---|---|
| Alaska | 0% | 0% | $3,785 | 0% state + local | Permanent Fund Dividend paid to residents |
| Florida | 0% | 0% | $2,555 | 6% + local | Most popular retirement destination |
| Nevada | 0% | 0% | $1,970 | 6.85% + local | No estate/inheritance tax |
| New Hampshire | 0% | 0% | High | 0% | Eliminated I&D tax Jan 2025 |
| South Dakota | 0% | 0% | $2,590 | 4.5% + local | Very low overall burden |
| Tennessee | 0% | 0% | $1,400 | 9.556% | Low property tax |
| Texas | 0% | 0% | $4,111 | 6.25% + local | Higher property taxes |
| Washington | 0% | 0% | Varies | 6.5% + local | 7% cap gains tax over $270k |
| Wyoming | 0% | 0% | $1,659 | 5.56% | Lowest overall tax burden |
States with full retirement income exemptions (4 states)
| State | Income Tax Rate | 401k/IRA Treatment | Social Security | Property Tax | Notes |
|---|---|---|---|---|---|
| Illinois | 4.95% flat | Fully exempt | Exempt | Higher | All retirement income exempt |
| Iowa | 3.8% flat | Fully exempt (55+) | Exempt | $2,800 | Changed in 2023 |
| Mississippi | 4.4% flat | Fully exempt | Exempt | $1,189 (lowest) | Most tax-friendly overall |
| Pennsylvania | 3.07% flat | Fully exempt (59½+) | Exempt | $3,200+ | Very retiree-friendly |
Northeast states (11 states)
| State | Top Tax Rate | 401k Treatment | Exemptions/Deductions |
|---|---|---|---|
| Connecticut | 6.99% | Partial exemption | Full exemption under $75k AGI (single)/$100k (joint); IRA 75% exempt 2025, 100% in 2026 |
| Delaware | 6.6% | Partial exemption | $12,500 exclusion age 60+; $2,000 under 60 |
| Maine | 7.15% | Fully taxable | Pension deduction up to $48,216 with income limits |
| Maryland | 5.75% + local | Fully taxable | $34,300-$39,500 pension exclusion age 65+ (401a/403/457 only, not IRAs) |
| Massachusetts | 5% (9% over $1M) | Private: Taxable; Public: Exempt | Public pensions fully exempt; private taxable |
| New Hampshire | 0% | Fully exempt | No income tax |
| New Jersey | 10.75% | Fully taxable | Up to $100,000 exclusion (joint) for age 62+ with income ≤$150k |
| New York | 10.9% | Partial exemption | $20,000 exclusion per person age 59½+; government pensions fully exempt |
| Pennsylvania | 3.07% | Fully exempt | All retirement income exempt age 59½+ |
| Rhode Island | 5.99% | Partial exemption | $20,000 exclusion (pensions/401k, not IRAs) age FRA with income limits |
| Vermont | 8.75% | Fully taxable | $10,000 exemption certain pensions with income limits |
Southeast states (12 states)
| State | Top Tax Rate | 401k Treatment | Exemptions/Deductions |
|---|---|---|---|
| Alabama | 5% | Partial exemption | $6,000 exemption age 65+ (increasing to $12,000 in 2026) |
| Arkansas | 4.4% flat | Fully taxable | Limited deductions available |
| Florida | 0% | Fully exempt | No income tax |
| Georgia | 5.75% | Partial exemption | $35,000 exclusion ages 62-64; $65,000 exclusion age 65+ per person |
| Kentucky | 4% flat | Partial exemption | $31,110 deduction for retirement income |
| Louisiana | 3% flat | Fully taxable | $6,000 exclusion age 65+ |
| Mississippi | 4.4% flat | Fully exempt | All retirement income exempt |
| North Carolina | 4.25% flat | Fully taxable | No exemptions (but low rate) |
| South Carolina | 6.2% | Partial exemption | $15,000 retirement income exclusion; $10,000 additional age 65+ |
| Tennessee | 0% | Fully exempt | No income tax |
| Virginia | 5.75% | Fully taxable | $12,000 age deduction 65+ (income-based); military $20,000 age 55+ |
| West Virginia | 5.12% | Fully taxable | Phasing out SS tax (65% exempt 2025, 100% by 2026) |
Midwest states (12 states)
| State | Top Tax Rate | 401k Treatment | Exemptions/Deductions |
|---|---|---|---|
| Illinois | 4.95% flat | Fully exempt | All retirement income exempt |
| Indiana | 3.05% flat | Fully taxable | $1,000 exemption age 65+; $500 additional if AGI under $40k |
| Iowa | 3.8% flat | Fully exempt (55+) | No tax on retirement income age 55+ |
| Kansas | 5.58% | Partial exemption | Exemptions based on AGI |
| Michigan | 4.25% flat | Partial exemption | 75% deduction for born 1946-1962 (100% by 2026) |
| Minnesota | 9.85% | Fully taxable | Limited exemptions; one of highest tax states |
| Missouri | 4.8% | Partial exemption | Public pension: up to $46,381; private: $6,000 if income qualifies |
| Nebraska | 5.84% | Fully taxable | No exemptions |
| North Dakota | 2.5% | Fully taxable | Very low rates overall |
| Ohio | 2.5% | Fully taxable | No exemptions |
| South Dakota | 0% | Fully exempt | No income tax |
| Wisconsin | 7.65% | Fully taxable | $5,000 exclusion age 65+ with strict income limits |
Western states (13 states)
| State | Top Tax Rate | 401k Treatment | Exemptions/Deductions |
|---|---|---|---|
| Alaska | 0% | Fully exempt | No income tax |
| Arizona | 2.5% flat | Fully taxable | Low rate; military/civil service partial exemption |
| California | 13.3% | Fully taxable | Highest tax state; no exemptions |
| Colorado | 4.40% flat | Partial exemption | $20,000 deduction ages 55-64; $24,000 age 65+ |
| Hawaii | 11% | Fully taxable | Second highest; pensions exempt but not 401k/IRA |
| Idaho | 5.695% flat | Fully taxable | Limited federal/military pension exemptions |
| Montana | 5.9% | Fully taxable | $5,500 subtraction age 65+; SS partially taxed |
| Nevada | 0% | Fully exempt | No income tax |
| New Mexico | 5.9% | Fully taxable | $8,000 exemption age 65+; military $30,000 |
| Oregon | 9.9% | Fully taxable | High rates; $6,250 credit for low-income seniors 62+ |
| Utah | 4.55% flat | Fully taxable | $450 credit; phases out above $30k AGI |
| Washington | 0% | Fully exempt | No income tax (cap gains tax over $270k) |
| Wyoming | 0% | Fully exempt | No income tax |
What’s the best 401k withdrawal strategy to minimize taxes?
The proportional withdrawal strategy (most recommended)
Research from Fidelity shows the proportional approach reduces lifetime taxes by 40%+ compared to traditional sequential withdrawals.
Image by Ahmet Yüksek from Pixabay
How it works: Instead of depleting accounts in order (taxable → tax-deferred → tax-free), withdraw proportionally from all account types based on their percentage of total savings.
Visual: Proportional vs. Sequential Withdrawal Strategy Comparison
Portfolio Composition Example:
- 40% Taxable accounts ($200,000)
- 50% Traditional 401k/IRA ($250,000)
- 10% Roth accounts ($50,000)
- Total: $500,000
Strategy Comparison Over 25 Years:
| Strategy | Annual Withdrawal Method | Tax Bracket Stability | Total Taxes Paid | Portfolio Longevity | Tax Efficiency |
|---|---|---|---|---|---|
| Sequential (Old Method) | Deplete taxable first, then traditional, then Roth | Creates tax spikes in years 6-20 | $120,000-$150,000 | 23 years | ❌ Low |
| Proportional (Recommended) | 40% taxable, 50% traditional, 10% Roth each year | Maintains consistent bracket | $70,000-$90,000 | 24 years | ✅ High |
| Savings | $50,000-$60,000 (40% reduction) | +1 year | +40% |
Year-by-Year Breakdown for $60,000 Annual Need:
Proportional Method (Each Year):
- Withdraw $24,000 from taxable accounts (40%)
- Withdraw $30,000 from traditional 401k/IRA (50%)
- Withdraw $6,000 from Roth accounts (10%)
- Result: Stable 12% federal bracket throughout retirement
Sequential Method (Creating Problems):
- Years 1-5: Deplete $200k taxable (10-12% bracket) ✅
- Years 6-20: Large traditional IRA withdrawals push into 22-24% bracket ❌
- Years 13+: RMDs force even higher withdrawals, potentially 24-32% brackets ❌❌
- Result: Tax bracket jumps and higher lifetime taxes
Real-world Fidelity example:
- Profile: Joe, age 62, single filer
- Assets: $200,000 taxable (40%), $250,000 traditional 401k/IRA (50%), $50,000 Roth (10%)
- Income: $25,000 Social Security, $60,000 after-tax need
Traditional sequential approach:
- Portfolio lasts: 23 years
- Total taxes paid: $57,000+
Proportional approach:
- Portfolio lasts: 24 years (4% longer)
- Total taxes paid: $34,000
- Tax savings: $23,000 (40% reduction)
Implementation: If you need $60,000 annually, withdraw $24,000 from taxable (40%), $30,000 from traditional (50%), and $6,000 from Roth (10%).
Comparison of withdrawal strategies
| Strategy | Tax Efficiency | Complexity | Best For | Pros | Cons |
|---|---|---|---|---|---|
| Proportional | Very high | Medium | Most retirees | 40% tax reduction; stable brackets; extends portfolio | Requires annual calculation |
| Tax bracket management | Highest | High | Large balances; active planners | Maximizes deductions; optimizes brackets | Complex; requires monitoring |
| Traditional sequential | Low | Low | Small balances; simple situations | Easy to implement | Creates tax bumps; higher lifetime taxes |
| Capital gains optimization | Very high | High | Large taxable holdings | 0% capital gains possible | Only for specific situations |
Tax bracket management strategy
Fill lower tax brackets strategically before RMDs force larger withdrawals.
Example for 2025:
- Married couple, both 67, $50,000 Social Security
- Strategy: Withdraw traditional IRA funds up to top of 12% bracket ($96,950 taxable income)
- Calculation: $96,950 – $30,000 standard deduction = $66,950 taxable
- After subtracting $50,000 SS (85% taxable = $42,500), can withdraw $54,450 from traditional IRA
- All taxed at 10-12% rates instead of 22%+ later
Capital gains rate optimization
Fidelity data shows strategic use of 0% capital gains rate.
2025 thresholds for 0% long-term capital gains rate:
- Single: Up to $48,350 taxable income
- Married filing jointly: Up to $96,700 taxable income
Example:
- Jamie (single): $26,925 ordinary income + $5,000 capital gains
- After $15,000 standard deduction = $11,925 taxable income
- Capital gains taxed at 0% (under threshold)
- Total estimated federal tax: $1,192
Comparison – higher earner:
- David (single): $63,350 ordinary income + $5,000 capital gains
- Higher bracket triggers 15% capital gains rate
- Total estimated federal tax: $6,313
Strategies to minimize taxes
Before age 59½:
- Build Roth accounts during working years for tax-free withdrawals
- Strategic asset location (bonds in tax-deferred, stocks in taxable)
- Consider substantially equal periodic payments (SEPP) if early access needed
Ages 59½-72 (before RMDs):
- Roth conversion window: Convert traditional to Roth at lower rates before Social Security starts
- Fill lower tax brackets intentionally with traditional IRA withdrawals
- Delay Social Security to age 70 for 8% annual increase and lower current income
Age 73+ (RMD years):
- Use Qualified Charitable Distributions (QCDs): Up to $108,000/year directly to charity (age 70½+)
- QCDs count toward RMD but not included in taxable income
- Coordinate withdrawals with Medicare IRMAA thresholds to avoid surcharges
- Balance multiple income sources to minimize Social Security taxation
How does SECURE 2.0 affect my 401k withdrawals?
Major SECURE 2.0 provisions (2024-2025)
RMD age increases (IRS guidance):
- Age 73: Current RMD starting age (for those born 1951-1959)
- Age 75: Future RMD age beginning 2033 (for those born 1960+)
- Previously was age 72, changed by SECURE 2.0
RMD penalty reduction:
- Reduced from 50% to 25% of shortfall
- Further reduced to 10% if corrected within 2 years
- Applies to missed RMD amounts
Enhanced catch-up contributions (ages 60-63):
- New “super catch-up” allows $11,250 instead of standard $7,500
- Total 401k contribution: $34,750 for ages 60-63
- Provides extra savings opportunity in peak earning years
Roth 401k/403b RMD elimination (effective 2024):
- Roth accounts in employer plans no longer have RMDs during owner’s lifetime
- Previously, Roth 401k required RMDs at age 73
- Roth IRAs continue to have no RMD requirement (unchanged)
- Action item: Consider leaving Roth funds in 401k or rolling to Roth IRA
Qualified Charitable Distributions (QCDs):
- 2025 annual limit: $108,000 (indexed for inflation, up from $105,000)
- One-time gift to split-interest entity: $54,000
- Available age 70½+
High earner Roth catch-up mandate (delayed to 2027):
- Employees earning over $145,000 must make catch-up contributions as Roth (after-tax)
- Originally scheduled for 2026, delayed by final regulations
- Affects approximately 7% of participants
Emergency distributions (2024):
- Up to $1,000 annually for emergencies
- No 10% early withdrawal penalty
- Must wait 3 years before next emergency withdrawal unless repaid
- Self-certification allowed
10-year rule for inherited IRAs:
- Non-spouse beneficiaries must empty inherited accounts within 10 years
- If original owner died after RMD age, annual RMDs required during 10-year period
- Complex rules require careful planning
Real-world 401k withdrawal tax examples with specific numbers
Example 1: State residency impact
Scenario: Single retiree, age 67, $60,000 annual 401k withdrawal
California resident:
- Federal tax (after $15,000 standard deduction): ~$5,000-$7,000
- California state tax (~5-6% effective): ~$3,000-$3,600
- Total annual tax: $8,000-$10,600
- 25-year retirement: $200,000-$265,000 total taxes
Florida resident (same situation):
- Federal tax: ~$5,000-$7,000
- Florida state tax: $0
- Total annual tax: $5,000-$7,000
- 25-year retirement: $125,000-$175,000 total taxes
- Lifetime savings: $75,000-$90,000 from residency alone
Example 2: Proportional vs. sequential withdrawal
Assets: $500,000 total ($150k taxable, $300k traditional IRA, $50k Roth)
Sequential approach (taxable → traditional → Roth):
- Years 1-5: Deplete taxable account
- Years 6-20: Large traditional IRA withdrawals push into 22-24% brackets
- Years 13+: RMDs force even larger withdrawals, potentially 24-32% brackets
- Estimated lifetime federal tax: $120,000-$150,000
Proportional approach (30% taxable, 60% traditional, 10% Roth):
- Every year: Withdraw from all accounts proportionally
- Maintains consistent 12% bracket throughout retirement
- Traditional IRA balance reduced before RMDs, lowering future RMD amounts
- Estimated lifetime federal tax: $70,000-$90,000
- Tax savings: $50,000-$60,000 (40%+ reduction)
Example 3: Roth conversion in low-income years
Scenario: Married couple, both 65, retired but not yet taking Social Security
Current income: $30,000 from part-time work Traditional IRA balance: $800,000
Without conversion:
- At age 73, RMD on $1.2M (assuming growth) = ~$45,000/year
- Combined with Social Security ($50,000) = $95,000 total income
- Pushes into 22% bracket
With strategic conversions (ages 65-69):
- Convert $40,000/year to Roth (5 years = $200,000)
- Stay in 12% bracket each year
- Taxes paid on conversions: $24,000 total (12% × $40,000 × 5 years, simplified)
- At age 73: RMD on $720,000 (reduced) = ~$27,000/year
- Combined with Social Security = $77,000 total
- Stays in 12% bracket throughout retirement
- Plus $200,000 now growing tax-free in Roth
- Lifetime savings: $50,000-$80,000+
Example 4: Healthcare costs and withdrawal planning
Fidelity 2025 estimate: $172,500 average healthcare costs throughout retirement for 65-year-old couple.
Withdrawal strategy impact:
- Base Medicare Part B: $185/month ($2,220/year)
- IRMAA surcharge trigger: $106,000 MAGI (single)
- Large 401k withdrawal pushing above IRMAA threshold: +$888-$5,316/year in added premiums
Example – IRMAA impact:
- Couple with $190,000 MAGI (from large 401k withdrawal)
- Falls into second IRMAA tier: $259/month each (+$74/month per person)
- Added cost: $1,776/year in higher Medicare premiums
- Over 20 years: $35,520 in extra premiums
Solution: Spread withdrawals over multiple years to stay under IRMAA thresholds, or use Roth accounts for supplemental income (doesn’t count toward MAGI).
Example 5: QCD strategy for charitable retirees
Scenario: Age 74, single, $100,000 traditional IRA, RMD = $4,000
Without QCD:
- $4,000 RMD added to taxable income
- In 22% bracket: $880 federal tax + potential state tax
- Separate charitable donation: $4,000 itemized deduction (may not exceed standard deduction)
With QCD:
- Direct $4,000 from IRA to qualified charity
- Satisfies RMD requirement
- $0 added to taxable income
- $880+ in tax savings
- Plus: Lowers AGI for Social Security taxation and Medicare IRMAA calculations
FAQ: Common questions about 401k withdrawal taxes
Q1: What’s the best state to retire in for 401k taxes?
A: The 13 states with no tax on retirement income are optimal: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming (no income tax), plus Illinois, Iowa, Mississippi, and Pennsylvania (full retirement exemptions).
Mississippi ranks #1 overall in Kiplinger’s 2025 analysis when combining zero retirement income tax with the nation’s lowest property taxes ($1,189 median). Florida remains most popular for climate and no income tax.
Consider total tax burden: Texas has no income tax but high property taxes ($4,111 median). New Hampshire has no income tax but high property taxes. Balance retirement income tax savings with property tax, sales tax, and cost of living.
Q2: How much of my 401k withdrawal will I lose to taxes?
A: Federal taxes range from 10-37% depending on your total taxable income and filing status. State taxes add 0-13.3% depending on your state.
Typical scenarios:
- Married couple, $70,000 annual withdrawal, Florida: ~15-18% total (federal only)
- Same couple, California: ~20-25% total (federal + state)
- Single, $40,000 withdrawal, no-tax state: ~10-15% total (federal only)
- Single, $40,000 withdrawal, high-tax state: ~15-23% total
Important: Traditional 401k withdrawals are taxed as ordinary income, not capital gains. There’s no preferential rate.
Q3: Do I pay state taxes if I move after contributing to my 401k?
A: You pay taxes based on your state of residence when you take the distribution, not where you contributed. This is a huge planning opportunity.
Example: You worked 30 years in California (high tax), contributing to your 401k. You retire and establish residency in Florida (no tax). Your 401k withdrawals are taxed by Florida only (meaning no state tax). California cannot tax you as a Florida resident.
Key: Properly establish residency before large distributions. Requirements typically include:
- Physical presence 183+ days/year in new state
- Driver’s license and vehicle registration
- Voter registration
- Primary residence and homestead exemption
- Update all financial accounts and estate documents
Q4: What is the 10% early withdrawal penalty?
A: Withdrawals before age 59½ face a 10% additional tax on top of regular income tax, unless you qualify for an exception.
Exceptions to 10% penalty:
- Age 55+ and separated from service (applies only to that employer’s plan)
- Substantially Equal Periodic Payments (SEPP/Rule 72t)
- Total and permanent disability
- Medical expenses exceeding 7.5% of AGI
- Qualified Domestic Relations Order (QDRO)
- Death of participant
- Qualified birth/adoption expenses (up to $5,000)
- Qualified disaster distributions
- New for 2024: Terminal illness, domestic abuse victims (up to $10,300)
Example: Withdraw $50,000 at age 52 with no exception:
- Regular income tax (assume 22% bracket): $11,000
- 10% penalty: $5,000
- Total tax: $16,000 (32% effective rate)
- Plus state tax if applicable
Q5: When do I have to start taking RMDs?
A: RMD age is 73 if you were born 1951-1959. The age increases to 75 starting in 2033 (for those born 1960+).
First RMD timing:
- Deadline: April 1 of the year following the year you turn 73
- Warning: Delaying first RMD means two distributions in one year (first RMD + current year RMD), potentially pushing into higher bracket
Subsequent RMDs:
- Due by December 31 each year
- Based on prior year’s December 31 account balance ÷ IRS life expectancy factor
Still working exception:
- Can delay RMDs in current employer’s 401k until actual retirement
- Only if you’re NOT a 5%+ owner of the company
- Does not apply to IRAs or previous employers’ 401k plans
Penalty: 25% of the amount you should have withdrawn (reduced from 50% by SECURE 2.0), or 10% if corrected within 2 years.
Q6: How can I avoid paying taxes on my 401k withdrawal?
A: You cannot completely avoid federal taxes on traditional 401k withdrawals, but you can dramatically reduce them:
Minimize federal taxes:
- Use Roth accounts – Roth 401k/IRA withdrawals are 100% tax-free if you’re 59½+ and account is 5+ years old
- Strategic withdrawal timing – Fill lower tax brackets (10-12%) in early retirement before RMDs
- Roth conversions – Convert during low-income years, pay taxes at lower rates
- QCDs – Age 70½+, donate up to $108,000/year directly from IRA to charity (counts toward RMD, not taxable)
- Proportional strategy – Reduce lifetime taxes by 40%+ compared to sequential withdrawals
Eliminate state taxes:
- Relocate to one of 13 no-tax states before taking distributions
- Saves $2,000-$6,000+ annually on $50,000 withdrawal
Tax-free exceptions:
- Qualified disability distributions
- Return of after-tax contributions (basis)
- Rollover to another qualified plan (not taxable event)
Q7: Should I do a Roth conversion?
A: Roth conversions make sense when you can pay taxes at a lower rate now than you’ll pay later.
Best candidates for Roth conversion:
- Early retirees (ages 59½-72) with low current income before Social Security/RMDs start
- High earners expecting large RMDs that will push into high brackets
- Those who want to reduce RMDs and avoid future tax bumps
- Estate planning – Roth IRAs have no RMDs and provide tax-free inheritance
- Residents of high-tax states planning to stay – Lock in current rate
When NOT to convert:
- Currently in higher tax bracket than expected in retirement
- Need the conversion tax payment from IRA funds (depletes account)
- Over age 73 with mandatory RMDs (limited conversion opportunity)
- Moving to no-tax state soon (wait until after relocation)
Strategy: Convert enough each year to fill up the 12% or 22% bracket without pushing into the next bracket.
Example: Married couple in 12% bracket with room to convert $30,000 without entering 22% bracket. Convert $30,000 annually for 5 years = $150,000 converted at 12% rate instead of potential 22-24% rate later.
Q8: What is the 20% withholding rule?
A: The IRS requires mandatory 20% federal tax withholding on eligible rollover distributions paid directly to you from your 401k.
How it works:
- Request $50,000 distribution from 401k
- Plan withholds $10,000 (20%) for federal taxes
- You receive check for $40,000
Why it matters:
- If your actual tax rate is lower than 20%, you get refund when you file taxes
- If your actual rate is higher than 20%, you owe additional tax
- The 20% is just an advance payment, not the final tax amount
How to avoid:
- Direct rollover (trustee-to-trustee transfer) to IRA or another 401k
- No withholding on direct rollovers
- Money never touches your hands
60-day rollover trap:
- If you receive $40,000 (after 20% withholding) and want to roll over the full $50,000 to avoid taxes
- You must deposit the full $50,000 (including the $10,000 withheld)
- Must come up with $10,000 from other sources
- If you only roll over the $40,000 you received, the $10,000 withheld is taxable income + 10% penalty if under 59½
Q9: How do state taxes work if I’m a snowbird?
A: You’re taxed by your state of domicile (primary legal residence), not where you spend time temporarily.
Domicile determination factors:
- Where you spend more than 183 days per year (most states)
- Driver’s license and vehicle registration
- Voter registration
- Location of primary residence and homestead exemption
- Where you file resident state tax return
- Location listed on federal tax return
- Where you receive mail and maintain bank accounts
Snowbird strategy:
- Establish domicile in tax-friendly state
- Keep detailed calendar of days spent in each state
- Update all legal documents and registrations
- File part-year resident returns in year of move
Warning: High-tax states (California, New York) aggressively audit domicile claims. Maintain clear documentation.
Q10: What happens if I miss my RMD?
A: Missing an RMD triggers a 25% excise tax on the amount you should have withdrawn (reduced from 50% by SECURE 2.0).
Example: Required to withdraw $20,000 but withdraw $0.
- Penalty: $5,000 (25% of $20,000)
- Still must withdraw the $20,000 and pay regular income tax on it
- Total cost: $5,000 penalty + $4,000-$7,000 income tax (depending on bracket)
Reduced penalty:
- Penalty reduced to 10% if you withdraw the shortfall and correct within 2 years
- File Form 5329 with explanation
How to avoid:
- Set calendar reminders each November-December
- Enable automatic RMD distributions from IRA custodian
- Calculate RMD using IRS Uniform Lifetime Table
- Work with financial advisor or tax professional
- Take RMD early in year (January-March) to avoid year-end rush
First-year exception: First RMD can be delayed until April 1 of following year, but then you’ll have two RMDs in one tax year.
Q11: Do I pay Social Security tax on 401k withdrawals?
A: No. 401k withdrawals are NOT subject to Social Security or Medicare payroll taxes (FICA). However, 401k withdrawals increase your income, which can cause more of your Social Security benefits to be taxed.
Social Security taxation thresholds:
Single filers:
- Combined income under $25,000: 0% of SS benefits taxable
- $25,000-$34,000: Up to 50% of SS benefits taxable
- Over $34,000: Up to 85% of SS benefits taxable
Married filing jointly:
- Combined income under $32,000: 0% of SS benefits taxable
- $32,000-$44,000: Up to 50% of SS benefits taxable
- Over $44,000: Up to 85% of SS benefits taxable
Combined income = Adjusted Gross Income + Nontaxable Interest + ½ of Social Security benefits
Example impact:
- Receive $30,000 Social Security + $20,000 pension
- Combined income: $20,000 + $15,000 (½ SS) = $35,000
- As single filer over $34,000: 85% of SS benefits ($25,500) becomes taxable
Strategy: Use Roth withdrawals or QCDs to get income without increasing AGI, keeping more Social Security tax-free.
Q12: What’s better – lump sum or periodic withdrawals?
A: Periodic withdrawals are almost always better from a tax perspective.
Lump sum disadvantages:
- Pushes you into highest tax bracket in one year (potentially 32-37%)
- Triggers or increases Social Security taxation
- May trigger Medicare IRMAA surcharges for 3 years (2-year lookback)
- No opportunity to tax-loss harvest or optimize
- State tax all paid in one year (if in taxable state)
Example – lump sum:
- Take $200,000 in one year
- Married couple with $40,000 other income
- Taxable income: $210,000 (after standard deduction)
- Federal tax: ~$35,000-$40,000 (24-32% brackets)
- Plus state tax if applicable: $10,000-$26,000
- Plus triggers IRMAA for next 3 years: ~$3,000+
- Total cost: $48,000-$69,000 (24-35% effective rate)
Periodic withdrawals ($40,000/year for 5 years):
- Annual taxable income: $50,000 (after deductions)
- Annual federal tax: ~$4,000-$5,000 (10-12% brackets)
- 5-year total: $20,000-$25,000 (10-12.5% effective rate)
- Savings: $28,000-$44,000 by spreading over 5 years
When lump sum makes sense:
- Moving from high-tax to no-tax state (take lump sum after establishing new residency)
- One-time major expense (home purchase, medical)
- Terminal illness with short time horizon
Sources
Federal Government Sources (.gov)
- IRS – 401k Limit Increases to $23,500 for 2025
- IRS – Notice 2024-80 (PDF) – Official 2025 contribution limits
- IRS – Tax Inflation Adjustments for 2025
- IRS – Revenue Procedure 2024-40 (PDF) – Tax brackets and standard deductions
- IRS – Required Minimum Distributions (RMDs)
- IRS – 401k Resource Guide – General Distribution Rules
- IRS – Exceptions to Tax on Early Distributions
- Social Security Administration – 2025 COLA Announcement
- Social Security Administration – COLA Information
- Medicare.gov – 2025 Medicare Costs
State Government Sources
- Virginia Department of Taxation – Virginia Taxes and Your Retirement
- Wisconsin Department of Revenue – FAQs for Retired Persons
- New Hampshire Department of Revenue – NH DRA
- Pennsylvania Department of Revenue – PA DOR
- Multiple state revenue department websites for state-specific tax information
Financial Institution Research
- Fidelity – 2025 Retiree Health Care Cost Estimate
- Fidelity – Tax-Savvy Withdrawal Strategies
- Fidelity – SECURE Act 2.0
- Vanguard – How America Saves 2025
- Charles Schwab – 401k Participant Survey 2024
Retirement Planning Resources
- Kiplinger – Retirement Taxes: How All 50 States Tax Retirees
- Kiplinger – The 10 Most Tax-Friendly States for Retirees
- AARP – States That Don’t Tax Your Retirement Distributions
- AARP – 2025 Retirement Changes
- AARP – 1040 Tax Calculator
All sources accessed and verified October 2025. Data current for 2025 tax year.
About the Author
Sridhar Boppana is transforming how families approach retirement security. Combining deep market expertise with a passion for challenging conventional wisdom, he’s on a mission to empower retirees with strategies that deliver true financial peace of mind.
Professional Expertise
- Licensed insurance agent and financial advisor specializing in retirement wealth management and guaranteed lifetime income strategies for pre-retirees and retirees
- Research-driven strategist with extensive market analysis expertise in alternative retirement solutions, including annuities, Indexed Universal Life policies, and tax-free income planning
- Prolific thought leader with over 530 published articles on retirement planning, Social Security, Medicare, and wealth preservation strategies
- Mission-focused advisor committed to helping 100,000 families achieve tax-free income for life by 2040
- Expert in protecting retirees from the triple threat of inflation, taxation, and market volatility through strategic financial planning
- Advocate for financial empowerment, dedicated to challenging conventional retirement beliefs and expanding options for retirees seeking financial security and peace of mind
When you’re ready to explore guaranteed income strategies tailored to your retirement goals, Sridhar is here to help.
Disclaimer
This article is for educational purposes only and does not constitute financial, legal, tax, or insurance advice. Tax laws change frequently, and individual circumstances vary significantly. Consult with qualified tax professionals, financial advisors, and legal counsel before making decisions about retirement account withdrawals or relocation. The information presented is current as of October 2025 but may not reflect the most recent legislative changes or court rulings affecting retirement account taxation.
